Low-cost deposits key to banks’ profitability

Low-cost deposits can be the key for banks’ profitability in the long run.

Published: March 15, 2014 4:00:27 am

Even as public sector banks seem to be facing an ever-rising mountain of bad loans, there seems to be some respite in the form of cheaper funds and deposit growth.

The cost of deposit, which is calculated based on the interest rate paid by the banks divided by the deposit amount, has a direct impact on banks’ profitability. With cheaper funds, banks can lend at a profit.

Latest government data indicates that the average cost of deposits in all but five of the public sector banks declined by December 2013 as compared to a year ago, though it continues to hover at over 7.5 per cent.

For instance, Bank of India’s average cost of funds eased to 5.66 per cent in December 2013 as against 6.01 per cent a year ago. Similarly for Punjab National Bank, it stood at 6.40 per cent in last December compared to 6.88 per cent in December 2012.

The outliers to the trend includes the country’s largest lender — State Bank of India  — where the average cost of deposits rose marginally to 6.25 per cent from 6.23 per cent but is still well below the industry level.

Equally significant is the increase in total deposits by public sector banks that grew 16.77 per cent by December 31, 2013 as compared to a 13.71 per cent growth a year ago. CASA deposits, too, increased 12.63 per cent year-on-year.

Low-cost deposits can be the key for banks’ profitability in the long run, though its sustainability would depend on factors such as credit growth and return on assets, which don’t seem very promising at the moment.

The return on assets of 22 state-owned lenders has deteriorated in the past one year and credit growth has been constant at about 16 per cent.

The issues were taken up at the quarterly review by finance minister P Chidambaram last week but clearly the Reserve Bank of India’s monetary policy review on April 1 may need to deal with these in greater detail.

Surabhi is a special correspondent based in New Delhi

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