Indian Households Still Trust Public Sector Banks Most With Their Deposits

India's public-sector banks lost market share in the bank deposit market in 2017-18. Contrary to perception this shift may have been driven more by an error in interest rate strategy, rather than concerns over the health of public-sector banks.

Granular data on trends in bank deposits released by the Reserve Bank of India on Monday shows that private sector banks took away 60 percent of the incremental deposits into the banking system between April 2017-March 2018. In the previous year, private bank had drawn 38.5 percent of the incremental deposits.

What private banks gained, public sector banks lost. Government-owned lenders managed to draw only a third of the fresh deposits coming into the system.

On an outstanding basis, public sector banks held around two-thirds of total deposits, said the RBI. Deposit growth data from individual banks shows that the loss of market share has been more acute for nationalised banks than the State Bank of India group. However, RBI has stopped giving a break-up between the two groups of government owned banks.

PSBs Retain The Trust Of Households

A break-up of the data, however, shows that Indian households did not move away from public sector banks.

Concerns have been raised that individual depositors are unnerved by the weak financial position of some public-sector banks and the fear of deposits being ‘bailed-in' in the event of a bankruptcy. Contrary to those concerns, the data shows that a majority of household deposits continued to flow to the public-sector banks.

In 2017-18, 63 percent of incremental household deposits were parked in public-sector banks. Private banks garnered 31.7 percent. The proportion was roughly the same in 2016-17, when public-sector banks took in 65 percent of the incremental deposits.

To be sure, public-sector banks continue to have a far wider branch network than private lenders, which gives them an advantage in retaining household deposits.

Private Corporations Switch

One segment that public-sector banks lost out in was deposits from private non-financial corporations. The data shows that private corporate deposits in public-sector banks actually fell by nearly 17 percent between FY17 and FY18. Private banks saw an 18 percent increase in deposits from this segment. Overall, deposits from this segment rose 4.8 percent between April 2017 and March 2018.

One reason for this could be the lower bulk deposit rates offered by public-sector banks, who were slow to raise rates after the rush of liquidity from demonetisation faded. While raising rates on some categories of deposits earlier in the year, SBI Chief Financial Officer Anshula Kant had told BloombergQuint the lender had seen outflows due to lower rates offered in comparison to private sector banks.

Private Banks Gathering Government Deposits

Deposits from government organisations saw only a marginal growth of 2.6 percent in 2017-18. Interestingly, nearly half of the incremental deposits, albeit a small amount, went to private banks.

Private-sector banks picked up 47.6 percent of the incremental growth from this category in FY18. Public-sector banks garnered a meager 2.6 percent of the fresh deposits under the government sector category. In FY17, too, private banks had picked up 44 percent of the government business. Organisations under this grouping include central and state government, public sector enterprises, state electricity boards, among others.