'Term Deposits On The Rise': Kotak Securities Director MB Mahesh On Changing Trends In Bank Deposits

There is a shift in the savings patterns in India. Until recently, banks have been the primary savings channels for most of India.

In recent years, however, households have been investing their savings into mutual funds, equity and real estate, the last of which has seen a sharp jump. The share of mutual funds (MF) in households' financial savings stood at 6.3 per cent last year.

A report authored by researchers at the National Institute of Public Finance and Policy says that during the past five years, savings in physical assets ranged between 58-60 per cent of household savings. Last year, the share of savings in physical assets jumped to 65 per cent.

Now, let's look at another trend, term deposits.

Kotak Institutional Equities banking analysts looked say they are seeing a few unique trends: (1) deposit mobilisation by banks was skewed in the 1- 3 year window, unlike what we have seen in the past, as this bucket has the highest share in the overall deposits since we have been able to track this data.

Kotak analysts say they are surprised at the sharp change in consumer preference toward the 1-3 year bucket.

Govindraj Ethiraj, Founder, The Core sought to gain some  broader insights into the deposits landscape in India, what is changing and what is not and what we could take away at this point. He caught up with MB Mahesh, Director at Kotak Securities and began by asking him to define the deposits landscape.

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Can you give us a sense of the banking deposit landscape in India at this point?

Broadly, if you look at the Indian banking system, it is a 180-odd lakh crore deposit market. We have been growing at about 15% for the last 50-60 years, if one looks at the long-term trends around the deposit book.  This market can be broken into three buckets–current accounts, savings accounts, and term deposits. Current account is the corporate scheme used mostly by the SME borrowers for their daily activities; savings is what most consumers keep in the bank account, and term deposits are long-term. The market broadly split has approximately over 45% in the CASA (current account and savings account) book and about 55% in the term deposit books

It is important for banks to source CASA as these deposits are low cost in nature and hence provide the maximum profits. However, from a consumer standpoint, CASA tends to be a lower interest rate product and hence is used mostly for transactional and not long-term purposes.

In a nutshell, we are an approximately 180 lakh crores market, growing at 15% with 45% in CASA-more savings, less current-and the balance is on the term deposit side. If you look at the structure of those deposits, it has moved in line with the growth between public sector and private sector banks.

What has changed either significantly or otherwise in the last decade or so?

Interestingly, we see a higher preference for current account and savings accounts when compared with the last decade. While it is hard to establish a clear trend on aspects that could define the savings behaviour of individuals, declining interest rates in the last decade could be one of the aspects that contributed to this. The difference between the offerings of a savings account and a term deposit was likely minimal, leading to a higher preference for owning a savings account and keeping one's deposit in it.

Another aspect could be the fact that many of these consumers have recently come into banking behaviour and hence the preference to rely more on the savings account than the current account.

The reason why I make the second statement is that when one looks at the deposit book outside of the metro markets, CASA share tends to be extremely high-almost as high as 50-60% of deposits. This reveals that the sensitivity of the savers to keep their deposits in term deposits is not high at all. 

On the other hand, if one considers the metro market, where the banking behaviour is a little more evolved, the tendency to save in term deposit starts kicking in once the interest rate differential is meaningful enough. However, these are assumptions or at best guess work and we would need more data to confirm this trend. 

What has changed particularly in the last year or two?

We have observed that, post Covid 19, consumers are starting to save a little bit more. So we saw a spurt in deposit creation around 2020-2021. 

Presently, we are seeing a massive slowdown in the CASA growth while on the other end, there is a marked increase in term deposits. This essentially indicates that the banking system as a whole is offering higher interest rates and consumers are responding by moving towards term deposits. 

It is also interesting to note, this year,  the growth rate in households continues to remain very weak. We are not yet aware of the reasons behind this. However, if we analyse the deposit book from the who is saving or the ownership lens, then we see household saving has been consistently declining, corporate savings is reasonably good, and the Government saving is not as high as it used to be in the past. This is not good news for now. Why? Ideally, you need robust household savings. Otherwise, there will be a  scenario where a bulk of the deposits are coming from the corporate side at least for now. So, from a trend perspective, we are seeing more people putting money in term deposits, more deposits getting created from the corporate side rather than the household side. 

Again, it is interesting to note, if one considers the overall deposit on the term deposit side, 50% of the deposits today is contributed by non-households rather than households. That is the structure of the market we have and this tends to less stable typically get out of a household.

What is the macro takeaway from this particularly on the household side?

I would say this is not good news because we are probably in a situation where the savings is not as strong as what it used to be previously. Especially when looking at the household leverage–it does appear that they are taking more debt than in the past.

So on the loan book side, we see a lot more loans going into individuals whereas we see less saving on the deposit side from the households. So it broadly indicates that the leverage at the household level is increasing with each passing year. Is it a point of concern? Probably no, but directionally these are not great news as well.

You are also saying that corporate deposits are strong and continuing to be so…this almost suggests that businesses are doing well in India but individuals, in a rough way…

That is true, unless we prove that we are saving excessively through other products such as insurance, debt mutual funds,etc. If the channel of savings is happening through other formats, then probably bank savings is a little bit lower. However, we are not able to establish that clear trend which points out that household saving is actually that solid enough.

There has been talk about people migrating to mutual funds, in the last few years with the bull market and so on. Are you then saying that the two are not connected?

It is still not pointing to the fact that we have materially changed our savings behaviour. If you look at the deposit book and the debt mutual fund and add that up as well, so far it is not conclusively pointing to the fact that household savings has actually gone up. It probably is still a little bit on the weaker side.

You have been studying the banking sector for almost a decade and now, for the first time you have an age profile  in terms of deposits…

We have been always wondering as to who is saving and that data has been really hard to get. Surprisingly the RBI did  point out the nature of savings. Here is what we see: When you break it up into two parts-savings book and the term deposit book, in the savings book, we see a fairly large representation of people between the ages of 25-40. So, approximately, a quarter of the savings account book comes from the age profile of 20-40, and if you add the 40-60 age group to it, the number goes up to almost above 70 per cent.

On the other hand, there is an extremely low representation from the 25-40 year age group in the term deposit book. The group that accounted for almost a quarter of the book on the savings account side, contributes to just 15%of the term deposits. But this is not an unexpected outcome because wealth typically gets created in the 40-50 year bracket. 

People above 70 years account for 20% of the term deposit book, and those between 60-70 account for 25%, and the 40-60 cohort account for another 35%. This essentially means that these three age buckets account for almost  80% of the term deposits and there is an under representation from the 25-40 years. 

This is not surprising. We are essentially looking at long-term trends and if the slowdown on the household side continues, in the next few years we will be able to establish which part of the age profile is saving more and which is saving less.

Anecdotally, we hear that consumers have started to spend a lot more post Covid, so they are probably drawing down on the excess savings they did previously. But we still do not have evidence to prove it one way or the other.

The 70 plus age group is an interesting category. How does this profile of depositors behave or have behaved?

We do not know. This is the first year that we have got the data. However, if you term deposits, people have started saving for a much shorter duration than what they used to in the past. Ten years ago, deposits would typically be for a 3-5 years duration. Today, we are seeing a preference for the 1-3 years duration for deposits. This is probably the highest we have seen ever since this data has been released by the RBI. 

What does this mean? Do average consumers perceive their ability to hold deposits for more 1-3 years as low, or are banks pricing their deposits in a manner that encourages the 1-3 years time frame? We do not, yet, know which of the above two reasons has led to the shift but we definitely know the preference to keep it in the 1-3 years time frame is the highest we have seen in the last two decades.