We will discuss why SBI is trying to lure depositors with its innovative product.

The News

SBI’s chairperson, CS Setty, revealed in his latest interview with Press Trust of India (PTI) that the bank is considering launching new products to attract more depositors.

It aims to attract younger customers, particularly Gen Z, by offering a combination of recurring deposits and SIP.

You may wonder why SBI is doing it. After all, it is the biggest bank by far in terms of deposits. For context, for every ₹100 deposited in Indian Banks, nearly ₹25 goes to SBI.

Not just SBI, but all banks too are trying to lure depositors by offering higher interest rates.

Let me tell you what’s going on behind the scenes.

In the past few years, the credit growth rate has been higher than the deposit growth rate. Basically, the banks are giving more loans than deposits they are getting.

It might not harm in the short run, but if you keep stretching it, things could go south. So the RBI raised a concern asking banks to narrow the gap between credit and deposit growth.

Why do banks want you to deposit more money?

When you deposit money in the bank, say ₹1 lakh, the bank doesn’t just let it sit there. It keeps a small portion, say 10% (₹10,000), as a reserve, and lends out the rest (₹90,000) to someone else.

The person who borrows that ₹90,000 spends it, and whoever receives it (say a shop owner) might deposit some portion or all of it back into the bank.

Now, the bank has more deposits to work with. Again, it would keep 10% as a reserve and lend the rest to another borrower.

This process repeats with each deposit, and every time, the bank is able to lend out more money while keeping a fraction as a reserve.

Even though the original deposit was ₹1 lakh, through lending and re-depositing, the bank can create a much larger amount of “money” circulating in the economy.

The catch

Banks assume that not all depositors will withdraw their money at the same time. So they keep a fraction of total deposits as reserves (often required by regulation) and lend out the rest.

They want you to keep depositing your money. If the growth of deposits is slower, banks would be forced to slow down credit expansion.

To conclude

These deposits are not only low-cost funding for banks, but also it’s about ensuring the bank can maintain healthy credit expansion in the long run.

It is also a reason the government wants every citizen to have access to banking facilities. It’s a win-win for everyone.