CHAPTER 4 IMPACT OF PROMOTIONAL ACTIVITIES ON BANKS DEPOSITS

Transcription

1 CHAPTER 4 IMPACT OF PROMOTIONAL ACTIVITIES ON BANKS DEPOSITS One of the important functions of the Bank is to accept deposits from the public for the purpose of lending. In fact, depositors are the major stakeholders of the Banking System. The depositors and their interests form the key area of the regulatory framework for banking in India and this has been enshrined in the Banking Regulation Act, The Reserve Bank of India is empowered to issue directives / advices on interest rates on deposits and other aspects regarding conduct of deposit accounts from time to time. With liberalization in the financial system and deregulation of interest rates, banks are now free to formulate deposit products within the broad guidelines issued by RBI. This policy document on deposits outlines the guiding principles in respect of formulation of various deposit products offered by the Bank and terms and conditions governing the conduct of the account. The document recognizes the rights of depositors and aims at dissemination of information with regard to various aspects of acceptance of deposits from the members of the public, conduct and operations of various deposits accounts, payment of interest on various deposit accounts, closure of deposit accounts, method of disposal of deposits of deceased depositors, etc., for the benefit of customers. It is expected that this document will impart greater transparency in dealing with the individual customers and create awareness among customers of their rights. The ultimate objective is that the customer will get services they are rightfully entitled to receive without demand. While adopting this policy, the bank reiterates its commitments to individual customers outlined in Bankers' Fair Practice Code of Indian Banks' Association. This document is a broad framework under which the rights of common depositors are recognized. Detailed operational instructions on various deposit schemes and related services have to be issued from time to time. 146

2 In deposit terminology, the term Bank Deposit refer to an amount of money in cash or check form or sent via a wire transfer that is placed into a bank account. The target bank account for the Bank Deposit can be any kind of account that accepts deposits. For example, a Bank Deposit is generally made when opening an account or in the course of routine business or personal transactions that involve placing funds with the bank for future use. Bank deposits can be made in a number of different ways. A deposit account is a savings account, current account or any other type of bank account that allows money to be deposited and withdrawn by the account holder. These transactions are recorded on the bank's books, and the resulting balance is recorded as a liability for the bank and represents the amount owed by the bank to the customer. Some banks may charge a fee for this service, while others may pay the customer interest on the funds deposited. MAJOR TYPES Transactional account Current account (Commonwealth) A deposit account held at a bank or other financial institution, for the purpose of securely and quickly providing frequent access to funds on demand, through a variety of different channels. Because money is available on demand these accounts are also referred to as demand accounts or demand deposit accounts, except in the case of NOW Accounts. Money market account A deposit account that pays interest, and for which short notice (or no notice) is required for withdrawals. In the United States, it is a style of instant access deposit subject to federal savings account regulations, such as a monthly transaction limit. Savings account Accounts maintained by retail banks that pay interest but can not be used directly as money (for example, by writing a cheque). Although not as convenient to use as checking accounts, these accounts let customers keep liquid assets while still earning a monetary return. 147

3 Time deposit A money deposit at a banking institution that cannot be withdrawn for a preset fixed 'term' or period of time. When the term is over it can be withdrawn or it can be rolled over for another term. Generally speaking, the longer the term the better the yield on the money. Call deposit A deposit account that allows for the withdrawal of funds without penalty, generally without notification to the bank. Often it bears a favorable interest rate, but also requires a minimum balance to take advantage of the benefits. Bank Rate and Borrowing Rate People make their funds available to the banks by depositing their savings in various types of accounts. In other words, bank funds mainly consist of deposits from the public, though banks may also borrow money from other institutions and the Reserve Bank of India. Banks, thus mobilises funds through its deposits. On public deposits the banks pay interest at and the rate of interest vary according to the type of deposit. The borrowing rate refers to the rate of interest paid by a bank on its deposits. The rates which the banks allow depend upon the nature of deposit account and the period for which the deposit is made with the bank. No interest is generally paid on current account deposits. The rate is relatively lower on savings account deposits. Higher rates ranging from 6% to 12% per annum are paid on Fixed deposit accounts according to the period of deposit. Banks also borrow from other institutions as well as from the Reserve Bank of India. When the Reserve Bank of India lends money to commercial banks, the rate of interest it charges for lending is known as Bank Rate. MARKETING STRATEGY SYSTEM For developing strategies relating to deposit mobilization and improving customer service, market research has to be conducted for market segmentation and targeting broadly covering the following categories. 148

4 Determinants of Deposits There are several factors which influence the growth of bank deposits. Some of them are: higher industrial and agricultural production increasing savings rate in the economy development programmes of the government to boost rural economy and small scale industries. Factors having adverse effect on deposit mobilization are: setback in the agricultural sector during poor monsoon years rising cost of hiring government reducing its budget and restricting money supply growing competition from other channels of investment which offer higher interest rates government's control on branch expansion of banks non-recovery of loans. Enhance Deposit Capabilities To make deposit management more effective, banks are investing in technology, tools and staff. In addition, they ll have to break down the walls separating the bank treasury functions from the lines of business to more effectively link deposit gathering and balance sheet management and centralized but flexible governance is vital to improving pricing capabilities. To enhance deposit capabilities of a bank following strategies needs to be considered: Pricing Methodology Linked to observed customer rate sensitivity and value Based on the customer s market reference point Exploits segment/ geographic differentials Test and learn approach 149

5 Governance Centralized data capture and pricing analytics Controlled exception management driven by the center Field flexibility to drive customer profitability Aligned business line, branch and sales officer incentives Pricing Process Automated analytics and rate management Timely exception resolution End-to-end process automation for deposit account on-boarding Technology Warehousing of required segmentation data Automated deposit analytics utilizing tools Automated data feeds capturing internal and external data needed to refresh reference rates and regression analytics. None of this is easy. But taking a more rigorous approach to managing deposit portfolios will capture significant value. TRENDS AND PATTERNS OF SAVINGS AND DEPOSITS This involves estimating current and potential markets for deposits and segmenting the market in term of geographical location, customers, socioeconomic characteristics, and other related factors. Customer Behaviour, Attitude, and Perceptions This involves understanding customer profile, their socio-economic and demographic background, their psychographic make-up, motivations behind their savings, awareness of and attitude to various modes of savings, and reasons for their preference for one form of savings over another. This will help bankers in providing new banking services/products through which even non-bank customers can be adopted. Customer Services Launching new schemes with advertisements attracts new depositors. However, what ultimately 150

6 sustains the process of generation of new deposits and continues the acceleration of deposit mobilization is the quality of customer service as perceived by customers. Bank's performance in different banking services like withdrawal of cash, collection of cheques, quality and adequacy of infrastructural facilities available to customers, attitudes of bank employees towards customers, promptness, and general attitude have to be analyzed and evaluated before strategy formulation. ANALYSIS OF SECONDARY DATA As we know that the promotion expenditure is the part of the operating expenses, so in this part we can analyze the impact of increase in the advertisement and publicity expenses and overall operating expenses on the deposits of the banks. Following table shows the five year (from 2010 to 2014) data of Deposits, expenses on promotional activities and operating expenses of SBI and ICICI bank (as these two banks are our selected population for the study). As we can see in the following tables that all the deposits i.e. saving, current and term, expennses are taken collectively this is because of the reason that in most of the financial statement of different banks they have not shown them separately. 1) DEPOSITS Table 4.1: Deposits of SBI and ICICI bank S.No FY Deposits of SBI Deposits of ICICI , , , , , Source; Annual report of SBI and ICICI 151

7 Graph 4.1 : Deposits of SBI and ICICI bank Deposits of SBI : In this competitive and challenging scenario, despite shedding high cost bulk deposits of Rs.77,679 crores (-50.15%), Bank's deposits went up by Rs.62,043 crores in FY 2010, driven by CASA growth of 26.76% and retail term deposits growth of 17.64%, resulting in a YoY growth of 8.36% in deposits from Rs.7,42,073 crores in March 2009 to Rs.8,04,116 crores in March Savings Bank deposits grew at an average of Rs.4,897 crores per month during FY 2010, total CASA growth during the year being Rs.73,168 crores. While market share in deposits in March 2010 at 16.31% (17.70% in March 2009), declined by 139 bps YoY, market share in low cost demand deposits at 17.51% (17.43% in March 2009) was up by 8 bps : Deposits of the Bank rose to 16.14% yoy from `8,04,116 crores in March 10 to `9,33,933 crores in March 11, driven by CASA growth of 22.14%. With sustained 26.20% rise in Savings Bank deposits, CASA ratio improved from 46.67% in March 10 to 48.66% in March 11, an increase of 199 bps. In an increasingly competitive environment, Bank s market share in total deposits at 16.40% in March 11 was 11 bps higher than 16.29% in March 10. In the same period, Bank s market share in low cost demand deposits at 18.23% was 90 bps higher than 17.33%. 152

8 : Deposits of Bank rose from `9,33,933 crores in March 11 to Rs.10,43,647 crores in March 12, a growth of 11.75%. But the fact that not only deposits are grown, but the quality of Bank s deposit growth is very good. In a scenario where other banks offer higher interest on savings bank deposits, SBI Savings Bank deposits increased by 11.27% from Rs.3,23,394 crores in March 2011 to Rs. 3,59,847 crores in March : The deposits of the Bank have risen to Rs.12,02,740 crores with the annual growth at 15.24% over that of last year s level of Rs.10,43,647 crores. What is noteworthy is that not only is this better than last year s growth, which was 11.75% but Bank has achieved this against the trend prevailing in the industry. Furthermore, it has come on the back of retail deposits and the deposit profile of the Bank shows a significant move away from high cost bulk deposits. Out of the total Term Deposits of Rs.6,04,649 crores, retail TDs comprise 78.27% at Rs.4,73,235 crores. Bank s strength lies in its wide reach covering all strata of society and the trust of the people. Due to this the customer acquisition on growth is also encouraging. Under Savings Bank, 287 lakh new accounts came to the books of the Bank representing 18.62% growth over last year and in Current Accounts bank could clock a growth of 8.43% with new accounts accretion at 2.20 lakhs : The deposits of the Bank rose by 15.94% to Rs.13,94,409 crores over the previous year s level of Rs.12,02,740 crores. Due to higher growth as compared to the industry average, the market share of the Bank, in all scheduled commercial Bank deposits (ASCB), increased by 11 bps to 16.57% in March The Bank s policy to shed high cost bulk deposits and more reliance on retail deposits has paid dividends, which has resulted in increase in retail TD ratio from 41.87% to 45.47% during FY Due to higher reliance on retail deposits, coupled with healthy CASA of 44.43%, the ratio of CASA + retail TD to domestic deposits increased smartly to 89.89% in Mar 2014 from 88.37% in the previous year. Savings Bank Deposits increased by 13.1% to Rs.4,69,262 crores from Rs.4,14,907 crores in March Under Savings Bank, 421 lakhs new accounts were opened during the year which were 46.7% higher than 287 lakhs accounts opened during the previous year. In current account also, Bank logged in a growth of 22.2% with new account accretion of 269 lakhs. 153

9 Deposits of ICICI : Growth in total deposits moderated from 19.9% on a year-on-year basis at end-fiscal 2009 to 17.0% at year-end fiscal The moderation was due to a lower growth of 16.2% in term deposits during fiscal 2010 compared to 23.9% in fiscal 2009 while demand deposits increased by 22.2% compared to a decline of 0.2% in fiscal : Deposits increased by 11.7% from Rs. 2, billion at March 31, 2010 to Rs. 2, billion at March 31, 2011 (including Rs billion of Bank of Rajasthan at August 12, 2010). Term deposits increased from Rs. 1, billion at March 31, 2010 to Rs. 1, billion at March 31, 2011 (including Rs billion of Bank of Rajasthan at August 12, 2010), while savings deposits increased from Rs billion at March 31, 2010 to Rs billion at March 31, 2011 (including Rs billion of Bank of Rajasthan at August 12, 2010) and current deposits increased from Rs billion at March 31, 2010 to Rs billion at March 31, 2011 (including Rs billion of Bank of Rajasthan at August 12, 2010). Total deposits at March 31, 2011 formed 67.4% of the funding (i.e. deposits and borrowings, other than preference share capital). During fiscal 2010 and fiscal 2011, the bank focused on their strategy of increasing the share of current and savings account deposits in total deposits and re-balancing our funding mix. The current and savings account deposits increased from Rs billion at March 31, 2010 to Rs. 1, billion at March 31, 2011 (including Rs billion of Bank of Rajasthan at August 12, 2010) and the ratio of current and savings account deposits to total deposits increased from 41.7% at March 31, 2010 to 45.1% at March 31, : Total deposits increased by 13.3% from Rs. 2, billion at March 31, 2011 to Rs. 2, billion at March 31, Savings account deposits increased by 13.7% from Rs billion at March 31, 2011 to Rs billion at March 31, Current and savings account (CASA) deposits ratio was 43.5% at March 31, 2012 compared to 45.1% at March 31, Term deposits increased by 16.6% 154

10 from Rs. 1, billion at March 31, 2011 to Rs. 1, billion at March 31, : Total deposits increased by 14.5% from Rs. 2, billion at March 31, 2012 to Rs. 2, billion at March 31, Savings account deposits increased by 12.6% from Rs billion at March 31, 2012 to Rs billion at March 31, The current and savings account (CASA) ratio was 41.9% at March 31, 2013 compared to 43.5% at March 31, Term deposits increased by 17.7% from Rs. 1, billion at March 31, 2012 to Rs. 1, billion at March 31, : Total deposits increased by 13.4% from Rs. 2, billion at March 31, 2013 to Rs. 3, billion at March 31, Savings account deposits increased by 15.7% from Rs billion at March 31, 2013 to Rs billion at March 31, Current account deposits increased by 17.1% from Rs billion at March 31, 2013 to Rs billion at March 31, Term deposits increased by 11.5% from Rs. 1, billion at March 31, 2013 to Rs. 1, billion at March 31, The current and savings account (CASA) ratio was 42.9% at March 31, 2014 compared to 41.9% at March 31, ) OPERATING EXPENSES A category of expenditure that a business incurs as a result of performing its normal business operations. One of the typical responsibilities that management must contend with is determining how low operating expenses can be reduced without significantly affecting the firm's ability to compete with its competitors. Fixed operating costs that a financial institution must incur, such as anticipated bad debt provisions. Noninterest expenses can include employee salaries and benefits, equipment and property leases, taxes, loan loss provisions, depreciation on assets, direct marketing agency expenses, other administrative expenses and professional service fees. Companies will offset noninterest expenses by generating revenue through noninterest income 155

11 Table 4.2 : Operating Expenses of SBI and ICICI bank S.No FY Operating Expenses of SBI Operating Expenses of ICICI Source; Annual report of SBI and ICICI Graph 4.2 : Operating Expenses of SBI and ICICI bank Operating Expenses of SBI : Operating Expenses were up by 29.84% in FY 2010 over FY 2009, driven by five key costs, as the Bank invested heavily in laying the foundation for future growth: (i) sharp increase in number of employees in various categories, the full impact of which on staff expenses was felt during FY 2010; (ii) Rs.627 crores arrears for wage revision pertaining to previous years provided during FY 2010; 156

12 (iii) Additional contribution for pension at Rs.1998 crores against Rs.1,469 crores last year; (iv) Additional expenses of Rs.59 crores on Financial Inclusion; and (v) An expenditure of Rs.347 crores incurred on opening of 1,049 new branches and installing 7,788 new ATMs during the year. Bulk of these got back ended to the last quarter of the year. Our profits for Q4, therefore, went down by Rs crores or 31.93% and the profit for the year remained flat at Rs crores : With lower growth in operating expenses at 13.27% in FY 11 against growth of 29.84% in FY 10, Bank s cost income ratio fell below the psychological threshold of 50% to 47.60% in FY 11 from 52.59% in FY 10. Average cost of deposits has come down by 54 bps to 5.26% in March 11 from 5.80% in March 10, though sequentially it is up from 5.20% in December 10. In the same period, the yield on advances at 9.56% was 10 bps lower than 9.66% and 2 bps lower than 9.58% in December : Staff expenses, which have largely been contained after full provisions for urrent wages and superannuation expenses rose by 11.59% from Rs.15,213 crores in FY 11 to Rs.16,974 crores in FY 12. Due to consolidated improvement all round, total provisions also increased by only 16.37% from Rs.17,071 crores in FY 11 to Rs.19,866 crores in FY : Operating expenses increased by 12.33% to a level of Rs.29,285 crores against last year s 26,069 crores mainly on account of overhead expenses due to significant increase in the physical spread and up gradation of branch ambience, results from which will flow-in in the coming years. Staff costs, including provision for superannuation benefits, have increased from Rs.16,974 crores to `18,381 crores an increase of 8.29% primarily due to all round increase in inflation. However, as a proportion of Operating expenses, staff expenses have declined to 62.77% from last year s 65.11% : Bank also made additional provision to cover expenses towards wage revision, one time provision for pension due to change in mortality table and payment for pension and gratuity. The three heads combined under the additional 157

13 provisioning accounted for 13.29% or Rs.4,751 crores of the total operating expenses of Rs.35,726 crores for FY Operating Expenses of ICICI : Operating expense decreased by 16.8% from Rs billion in fiscal 2009 to Rs billion in fiscal 2010, primarily due to a decrease in direct marketing agency expenses from Rs billion in fiscal 2009 to Rs billion in fiscal 2010 and a reduction in salary and other operating expenses from Rs billion in fiscal 2009 to Rs billion in fiscal 2010 on account of overall cost reduction initiatives undertaken by the bank : In fiscal 2011, operating expenses decreased by 35.26% from Rs billion in fiscal 2010 to Rs billion in fiscal 2011 primarily due to a decrease in employee expenses partly offset by a decrease in other administrative expenses, a decrease in direct marketing agency expenses and a decrease in depreciation on leased assets : Operating expenses increased by 18.6% from Rs billion in fiscal 2011 to ` billion in fiscal 2012 primarily due to an increase in employee expenses and other administrative expenses : Operating expenses increased by 14.8% from Rs billion in fiscal 2012 to Rs billion in fiscal 2013 primarily due to an increase in employee expenses and other administrative expenses : Operating expenses increased by 14.4% from Rs billion in fiscal 2013 to Rs billion in fiscal 2014 primarily due to an increase in other administrative expenses. 158

14 3) EXPENSES ON PROMOTIONAL ACTIVITIES (ADVERTISEMENT AND PUBLICITY ) Table 4.3 : Expenses on Promotional Activities in SBI and ICICI bank S.No FY Expenses on Promotional Activities of SBI Expenses on Promotional Activities of ICICI Source; Annual report of SBI and ICICI Graph 4.3 : Expenses on Promotional Activities in SBI and ICICI bank Expenses on Promotional Activities in SBI : : Expenses on promotion were fell below by 10.82% in FY 2010 over FY : Higher growth in expenses on promotion at % in FY 11 against growth of FY : Expenses on promotion were fell below by 19.87% in FY 2012 over FY

15 : Expenses on promotion increased by 86.01% from Rs billion in fiscal 2012 to Rs billion in fiscal : Expenses on promotion decreased by 27.60% from Rs billion in fiscal 2009 to Rs billion in fiscal 2010,primarily. Expenses on Promotional Activities in ICICI : Expenses on promotion were fell below by 21.02% in FY 2010 over FY : Higher growth in expenses on promotion at 34.25% in FY 11 against growth of FY : Expenses on promotion were fell below by % in FY 2012 over FY : Expenses on promotion increased by 42.78% from Rs billion in fiscal 2012 to Rs billion in fiscal : Expenses on promotion decreased by 3.05% from Rs billion in fiscal 2013 to Rs billion in fiscal Impact of Promotional Activities on bank growth SBI Table 4.4 : Amount of deposits, Operating expenses and expenses on promotion in SBI Rs. in crore FY2014 FY 2013 FY2012 FY 2011 FY 2010 Deposits Operating expenses Advertisement and publicity Source : Annual report of SBI 160

16 Table 4.5: % change of deposits, Operating expenses and expenses on promotion in SBI S. No FY Operating expenses Amount % change Advertisement & Publicity Amount Variation in % Amount Deposit % change Source: Annual report of SBI Graph 4.4 : % change of deposits, Operating expenses and expenses on Promotion in SBI 161

17 Analysis As we can see from the above table that the operating expenses of the banks are increasing continuously from 2010 to 2014 but reason behind the lower growth in operating expenses in FY 11 against growth in FY 10, Bank s cost income ratio fell below and average cost of deposits has come down in March 11 from March 10, though sequentially it is increasing continuously. Advertisement and publicity expenses are part of the operating expenses than it is also affected by the same factors. The above table shows that the deposits are also increasing, it might happen that the ratio and percentage of increase is different for the different banks, in some of the cases banks are having separate divisions for the promotion of their products. Through all above tables and graphs study reveals that there is no direct impact of promotion shown on deposits but as we can see the trends of bank in this competitive economy banks are continuously spending money and mind to retain existing customers and attracting new customers which shows as a result in their continuous growth in deposits. ICICI Table 4.6 : Amount of deposits, Operating expenses and expenses on Promotion in ICICI Rs. in crore FY2014 FY 2013 FY2012 FY 2011 FY 2010 Deposits 331, , , , , Operating Expenses Advertisement and publicity 10, , , , , Source : Annual report of ICICI 162

18 Table 4.7 : % change of deposits, Operating expenses and expenses on Promotion in ICICI S.No FY Operating expenses Amount % change Advertisement & Publicity Amount variation in % Amount Deposit % change Source: Annual report of ICICI Graph 4.5 : % change of deposits, Operating expenses and expenses on Promotion in ICICI 163

19 Analysis As we can see from the above table that the operating expenses of the banks are increasing continuously from 2010 to 2014 but reason behind the lower growth in operating expenses in FY 11 against growth in FY 10, decrease in employee expenses, decrease in other administrative expenses, decrease in direct marketing agency expenses and a decrease in depreciation on leased assets in March 11 from March 10, though sequentially it is increasing continuously. Advertisement and publicity expenses are part of the operating expenses than it is also affected by the same factors. The above table shows that the deposits are also increasing, it might happen that the ratio and percentage of increase is different for the different banks, in some of the cases banks are having separate divisions for the promotion of their products like: ICICI Bank is having a separate division named as DMA i.e. Direct Marketing Agency, some of the private banks are having their tie ups with some of the leading marketing forms who handle their overall marketing campaigns. Through all above tables and graphs study reveals that there is no direct impact of promotion shown on deposits but in 2009 bank spent a large amount on promotional activities which resulted in higher growth of deposits in As we can see the trends of bank in this competitive economy banks are continuously spending money and mind to retain existing customers and attracting new customers which shows as a result in their continuous growth in deposits. Conclusion An increase in Market Promotion appears to lead to an increase in profitability. Marketing promotion mix elements viz. Advertising and personal selling are moderately effective in providing information, creating awareness and changing attitude whereas ineffective in building company image and enforcing brand loyalty. A well -designed promotional strategy is very important to promote banking services effectively. The financial years between , shows very strong gains for the both SBI bank and ICICI bank. The SBI is a government owned bank (public sector), while ICICI is a privately owned bank (private sector). The SBI is much 164

20 older (more than 200 years old) and more established than the ICICI, which is less than 25 years old. The analysis suggested that the promotional activities between Banks do not differ significantly. Logically it can be said that marketing promotion does not differ from Bank to Bank. Above analysis highlight the impact of different promotional expenses on bank deposits. From the analysis, it is concluded that banks expenses on promotional activities are worthy. As above data shows that the impact of promotions on banks deposit is not always shown in the same year as it s a long term vision investment to attract new customer and retain older ones. Promotional activities are going to create an image in a customer mind and Once if the customer is attracted and get associated with the bank it s definitely going to increase its net worth or profitability which is shown in the above analysis also. The banking sector needs to focus more attention on the market promotion variables, to achieve their objective in this competitive world of financial services. 165