Why can retail liabilities be a good bet for banks today?
Inflation, depressed consumers, weak product consumption and rising key rates have combined to create a favorable situation for banks to develop their portfolio of retail liabilities
Retail liability products are where banks pay interest to customers when they store their excess funds or invest them. These include savings accounts, fixed deposits, recurring deposits and NRI deposits. Traditionally, banks have aggressively marketed their asset products as competition in the segment is high. Liabilities, on the other hand, were considered an organic growth segment. Business has been conducted primarily through word of mouth and traditional links.
While central banks previously followed a low interest rate regime, customers were comfortable fueling their consumption needs with loans and the like. However, with the changing economic landscape, customers are also keen to invest in short to medium term investments allowing banks to focus on their retail liability portfolio.
The asset portfolio challenge
With inflation leading to consumer depression, observers predict weak consumption in the near future. Moreover, with muted consumption, business entities can act cautiously and not accept more financial exposure. As a result, loans can become an unattractive proposition. In addition, interest rate hikes by various central banks, including the RBI, have forced banks to raise their lending rates, making advances to individuals and businesses, and consumption-induced lending, unattractive. . Banks’ asset portfolio is expected to remain modest with low business turnover due to depressed domestic and global economic conditions. Therefore, going forward, banks may see a gradual reduction in loans and advances. The challenge on the asset side of banking can provide an opportunity on the liability side for banks and their customers.
The passive opportunity
Rising interest rates have led banks to raise their deposit rates as well, making them attractive again for the retail investor. Equity market volatility and heightened economic uncertainty may have prompted investors to invest in positively rated fixed income securities and instruments with high liquidity.
Instruments such as fixed deposits, recurring deposits, etc. allow banks to access cheap funds. Additionally, since supply costs are low and the risk is spread over a larger population size, it presents a low-risk alternative for fundraising. Additionally, the growing influence of digital banking has simplified investing in liabilities for customers. The increase in financial and digital literacy has reduced customer resistance to investing in fixed term instruments such as fixed and recurring deposits etc.
Holders of these instruments then act as a lending database of potential customers for banks to disburse their loan products and further cement their relationships. Since account holders have entrusted their hard-earned savings to a particular bank, they develop trust and loyalty towards said bank. For example, a home buyer would automatically prefer the bank where they have a fixed deposit account when looking for a home lender. With the right strategy, banks can leverage their long-standing relationships with their customers and strengthen them by offering active-side services.
Similarly, for clients, investing in bank liability products presents a low-risk, high-liquidity option. They can appropriately reduce their portfolio risk until there is some stability on the macro front.
Also, the focus on liabilities can dampen inflationary tendencies. High interest rates coupled with banks’ increased emphasis on liabilities may incentivize the retail consumer to place their funds in secure investments. Consequently, it will leave less money in the hands of the consumer and suck excess liquidity from the market. This could result in downward pressure on prices.
Overall, retail liabilities have become a win-win proposition for banks and their customers today. With high inflation, volatile capital markets and a high interest rate regime, banks will derive significant business value by focusing on their retail liabilities.
The opinions expressed above are those of the author.
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