Moderation in savings, increase in digital account opening
Falling interest rates and increasing desire to save are creating a flurry of trends in different segments:
There were major changes i n the saving patterns of the bank customers in the last 3 years in view of increasing consumerism. Now covid has influenced this behavior.
Paul Thomas, MD and CEO of ESAF Small Finance Bank, believes that consumerism has been peaking in the last few years, despite some setbacks like demonetization and the Kerala floods. As a result, savings habit has been a bit sluggish, especially following the growth in capital market and consumer loans. “But the current developments”, says he, “may instill the savings habit back in consumers for some time, as the need of emergency funds is pretty evident now.”
Jayeshbhai Radadiya, chairman, Shri Rajkot District Cooperative Ban, echoes similar view. He says on analyzing the deposit data of the last 3 years, saving patterns among the bank’s customers seem to have changed. “Customers are keeping their savings in term deposits to earn better interest,” he says.
Virat Diwanji, group president – Retail Liabilities & Branch Banking at Kotak Mahindra Bank, has some interesting facts: “In FY 2019-20, as many as 4.4 million Kotak 811 accounts were opened and these accounts continue to be opened in April and May 2020 during the lockdown. In May alone some 14,000 accounts were opened per day. And out savings deposits have crossed the `1 trillion mark as of 31 March 2020. In Q4FY2019-20, the share of recurring deposits sourced digitally was 93% and that of term deposits 80%.”
Between FY2014 and FY2019, there has been a 2 percentage point decline in household savings. According to Prithviraj Srinivas, chief economist at Axis Capital, this is a consumerism phase and during this period while nominal disposable income growth has slowed but in real terms (net of CPI inflation), disposable income growth has actually picked up speed. “This should have ideally supported savings rate to either remain constant or improve. However, due to drastic decline in return from savings and investments, we have seen a shift up in the propensity to consume, and hence the fall in savings rate,” he explains.
INVESTMENT BEHAVIOR
Certain customer segments are shifting savings from traditional products like FDs, small savings schemes and NSCs to investing in equities, corporate FDs, IPOs, NCDs and commodities, while some segments are appearing to be going in the reverse direction. Paul Thomas maintaints that being a bank that mainly caters to the people at the bottom of the pyramid, ESAF Small Finance Bank
often comes across such behavioral shifts. “But, as we aspire to be a bank for all, we are focusing on other segments also, especially for liability and other banking products. I believe the shift to capital market is mostly shown by people at the B1 segment who are ambitious and are striving to reach the next level.”
Prithviraj Srinivas points out that average real returns from real estate, gold and equity have fallen relative to the boom period (2005 to 2009). Only bank deposits have been able to provide positive returns which it could not during the boom phase or the stimulus phase (2010 to 2014), he adds.
He elaborates: “First, low returns and weak affordability led to fall in savings in physical form during the consumerism phase and there is rising preference for financial assets. Second, due to the fall in cost of money led by higher liquidity in the formal financial system (especially after demonetization), we’ve seen a sharp rise in household leverage to 4.3% of Gross National Disposable Income (GNDI) in FY18.”
DURABLES CONSUMPTION
He adds that FY19 numbers are not known yet but it should invariably be the current cycle peak. Therefore, due to higher leveraged consumption, net financial savings of households did not naturally rise. Put simply, over the last few years, households as an aggregate, have been consuming more durables rather than saving/investing in a house, he argues.
Jayeshbhai Radadiya says customers who have knowledge of trading in the financial market have shifted from traditional investment modes to IPO/ NCD and mutual funds. Says he: “Our bank has 70-80% of business from the rural area; hence, I feel such transition is minimal, such movement is negligible. But customers from urban, city areas are eager to earn more income from such activities.
RURAL VS URBAN SAVINGS
Consumerism has affected the rural savings habit as well in the pre-covid period. Paul Thomas explains that as a bank that is assigned to bridge the financial inclusion gap, ESAF Small Finance Bank has already launched products like recurring deposits to support the rural savings habits. “He feels the impact of covid may trigger a rise in sales of products like RD, when things are back to normal.
Sree Rajkot District Cooperative Bank has a mixed trend as far as deposits are concerned. Jayeshbhai Radadiya states that as on 31 March 2020, the total deposits are `53.98 billion of which 57.84% consists of low-cost deposits and deposits covered under insurance as per RBI guideline. In urban areas the preference is more for term deposits and he expects this trend to continue for the next 1-2 years.
The bank has 70-80% business from rural areas and rural areas depend on agricultural and agri related activities. “As far as bank customers across the various segments are concerned, we believe that since monsoon was very good last year, deposits from rural areas will increase and deposits from urban area will decrease,” says Jayeshbhai Radadiya.
Prithviraj Srinivas does not recognize the distinction between rural and urban. He is of the view that since savings behaviour is driven by disposable income, education level, opportunities and aspiration level, there can be further moderation in savings rate driven by
fall in household income, increase in safety nets like MGNREGA and health insurance that lowers precautionary savings, and internet penetration plus e-commerce driving up aspiration levels in the hinterland.
CUSTOMER SEGMENTS
Covid could impact savings of different customer segments - urban & rural, low income, medium income and high income, employees, self-employed, businessmen, young, middle aged and senior citizens and male and female customers. Paul Thomas maintains that the pandemic has impacted all the segments of customers both in urban and rural areas. “I believe that people may come back to old savings habit at least for some time. They are likely to prefer less volatile systems like banks for safety reasons. The high-income group may also be more conscious on curtailing costs. Banks and other financial institutions should come forward and support small businessmen and employees with loans that allow long term repayment schemes. We have already launched a small ticket covid loan scheme with a moratorium period of 4 months.”
Rajkot District Cooperative Bank is planning to introduce various deposit products in the hope that these products will attract female customers of the bank in the rural areas.
DIGITAL ROUTE
Kotak Mahindra Bank is focused on the digital route for customer acquisition. It has extended its 811 account to all customer segments - corporates, salary accounts, etc. Virat Diwanji says the bank has recently introduced video KYC facility to open 811 savings accounts, a first in the Indian banking industry. “This is in line with our digital-first strategy and is a start-to-end fully integrated, zero-contact, completely digital and paperless account opening + full KYC journey. Customers can, hence, open a full-fledged savings account conveniently from the comfort of their home or workplace. Our focus continues to be on building digital journeys across products and services,” says he.
Prithviraj Srinivas expects a fall in savings in rural areas compared to urban India because of the structural decline in realization from agriculture and disruption in the remittance economy. Says he: “Low income households will likely be hit hardest due to fall in disposable income. Many households would turn from double income to single income households in FY2021, which reduces their collective savings rate. These households form the bulk of our economy and hence I expect household savings to fall in FY2021 like it has during previous recession. Middle income households with stable income streams are likely to turn more conservative and increase their savings in the light of weaker returns.”