Banking sector sees deposit build up contrary to expectations

• Despite receipt of salaries, people have limited opportunities to spend
• HNB chief however says these moneys would not stay long with banks
• Companies also conserving cash, trimming their spends through rationalising costs
• Banks request CB to open for more than 2 days a week, so they could deposit extra cash with CB

Contrary to the expectations that many would withdraw from their bank deposits to face the uncertain times created by the pandemic, the sector is seeing a build up of deposits, which the banks attributed to the limited spending opportunities available for people, although they received salaries for the months of March 
and April. 

“Surprisingly, on the deposit side, what we expected was there to be some amount of panic and people to withdraw deposits more than what they require and to keep excess amounts in their houses. We have actually seen something to the contrary,” Hatton National Bank PLC Managing Director/CEO Jonathan Alles said.

Majority of the employed people received their March salaries and at least part of their April salaries but they were unable to spend except for the essentials, as travelling, tourism and recreational activities were put on hold to restrict public congregation to contain the spread of COVID-19.

Meanwhile, the companies were also conserving cash, trimming their spends through rationalising costs, imposing salary cuts at least at executive levels and deferring big investments to pay future bills and stay afloat, until their businesses return to some normalcy. 

“My take on this is salaries are coming in for March and April; less opportunities to spend other than on essential items and there has been a tax relief that has been given, higher disposable income, you are not servicing your loans and those moneys are lying in the accounts,” Alles explained during an online seminar discussing the impact of COVID-19 on the banking sector, organised by the Advocata Institute, a free market think tank. 

However, Alles added that the banking sector should not be in the false belief that these moneys would stay long with the banks, as people would start spending when the opportunity arises. 

However, it is uncertain if the March and April deposit build up had the potential to offset or come anywhere close to the huge term deposits that the banks generally lure from aggressive New Year campaigns offered with fancy gifts. 

In any case, surely the banks do not have the assurance of the comfort of these moneys staying with them long, as the current deposit build up is into savings accounts, whereas with regard to the New Year season term deposits, the banks lock in such deposits from three to 12-month periods. 

The Monetary Board has made available several channels, including the deposit insurance scheme and slashing the bank rate to ensure access to liquidity, should any bank or finance company run into any liquidity issue, as a result of the loans being not recovered and the potential deposit withdrawals by people to meet exigencies during the pandemic-induced economic crunch.

It also allowed the banks to draw down from the capital conservation buffers and eased minimum capital rules.  
However, the current deposit build up has also posed the banks with fresh challenges—one from the rapid build up of cash reserves in the branches, ATMs and outsourced vendors and the knock on impact on the bottom lines, as banks are required to pay interest on deposits when they don’t generate income from loans and other incomes. 

At HNB, excess cash over the regulatory requirement has gone up by 50 percent at present and Alles urged the Central Bank to open for more than two days a week, so that the banks could deposit these cash with the Central Bank. 

He said allowing more cash deposits with the Central Bank would help banks from the security and efficiency standpoints.   

He further said the loan growth has virtually grounded to a halt, except for a few working capital loans and import loans and LC clearance facilities, which are identified as essential. 

At HNB, Alles said almost 50 percent of the bank’s staff was at work and three-quarter of the branches were open during the last six weeks and the rest were working from home, including himself, except in the case of branch visits undertaken during mornings.

First Capital Research recently re-estimated the banking sector loan growth for 2020 to be no more than 6 percent and a 13 percent decline in earnings, relapsing to 2015 levels.