The liquidity crunch in banking system has paved way for innovative financial products. Banking system has the brand image of stable credentials and immunity from market fluctuations. But they face the challenge of meeting return matrix of market linked financial products. The fine balance between 100 percent ‘safety’ and ‘matching’ financial market return holds the key to success of banking channel investment products.
It’s well-known fact that Indian banking system is facing liquidity crunch due to flow of money from bank deposits to financial markets especially mutual fund SIPs. The desperation for liquidity has surfaced at several deliberation of RBI Governor Shakti Kanta Das. RBI Deputy Governors have also voiced concern over liquidity crunch. Recently, State Bank of India (SBI) Managing Director Ashwini Tewari made a childish statement. He said that ‘a correction in the equity markets “over time” can help banks get back the deposits it has ceded’. Dwindling liquidity in banking channel has created “mismatch” within the credit-to-deposit (CD) ratio. Presently, the CD ratio stands at 0.79 per cent, surpassing its historical average of 0.75 per cent.
Generally, banks are allowed to launch Fixed Deposit for a maximum tenure of 10 years. This is because of looming uncertainty at interest rate curve. Liquidity poor banks are willing to take interest rate risk. Suryoday Small Finance Bank is in the process of launching Fixed Deposit Scheme of 20 plus years tenure. SBI Annuity Deposit Scheme has a tenure of 10 years. Let us discuss these two products in detail.
Suryoday Fixed Deposit will be similar to annuity plans of insurance companies. During a tenure of 20 years, it will act as Systematic Investment Plan (SIP) of mutual fund till 10th year. After 10th year, there will be facility of systematic withdrawal similar to Systematic Withdrawal Plan (SWP) of mutual funds. Interest rate for the this Fixed Deposit will be linked to the 10-year benchmark G-Sec. Explaining the product, R Baskar Babu, MD, Suryoday Small Finance Bank has said that ‘if a customer saves, say, Rs 50,000 per month for 10-11 years, after the 11th year he can opt for a systemic withdrawal plan, which is, say, two times the invested amount, automatically for another 11 years.”
SBI Annuity Deposit Scheme: State Bank of India has an innovative annuity deposit product for tenor expanding from 3 to 10 years. This scheme is a bit different from Suryoday FD. In SBI Annuity Deposit Scheme, you have the option of putting lumpsum amount as well. You can receive repayment through monthly annuity instalments which will consist of two components: principal as well as accrued interest. The interest rate offered by SBI is in line with normal FD rates of similar tenor. The depositor can avail a loan up to 75 per cent of his deposit amount. Besides this, the bank will make full payment in case of the death of depositor. Mutual fund don’t make ‘full’ payment in case of SIP.
Where is the innovation?: Banking products with SIP and SWP facility has been unheard of. Annuity products have always been high in demand. Banks have developed some hybrid products to test the water. Banking annuity product has four embedded components: the assured return in terms of FD, the SIP facility, the SWP mechanism and market neutral approach. The innovation has started bearing fruit as well. Growing popularity of SBI Annuity Deposit Scheme is one such instance.
