Analysis of Rapidly Growing Unclaimed Deposits in Indian Banks and Its Impact on the Banking Sector and Investors
Analysis for Layman:
The Indian government has reported that unclaimed bank deposits have increased by 28% to 42,272 crore rupees ($5.1 billion) as of March 2023, up from 32,934 crore rupees ($4 billion) in March 2022. Unclaimed deposits refer to savings or current account balances in a bank where there has been no customer-initiated activity for an extended period, typically over 10 years.
Of the total, public sector banks like SBI and PNB held 36,185 crore rupees ($4.4 billion) in unclaimed deposits, while private banks like HDFC Bank, ICICI Bank, and Axis Bank held 6,087 crore rupees ($740 million). These deposits remain on bank balance sheets until claimed by depositors or their legal heirs. According to India’s central bank guidelines, banks must display information on unclaimed deposits outstanding for over 10 years on their websites to enable account holders to verify and reactivate their accounts.
Impact on Retail Investors:
For retail investors, the significant increase in unclaimed deposits indicates potential inefficiencies in account management and customer engagement at some banks. State-run banks, which traditionally have a weaker customer focus, likely account for most of this growth. However, even private banks that have gained customers due to superior digital banking services seem unable to prevent accounts from becoming inactive over long periods.
This has a modest direct impact on bank profitability and shareholder returns since unclaimed deposits make up only around 0.5% of the total banking sector deposits in India. However, operational risks exist if banks cannot keep account holder data and contact details updated. Record-keeping and reconciliation errors could also lead to difficulties in verifying rightful ownership of aged, unused accounts. Over extended periods, the inability to engage with account holders raises concerns about business stability.
Investors should assess which banks have the best account management practices, digitization strategies, and customer analytics to minimize the growth of unclaimed deposits in the future. Well-run banks that can consistently provide an excellent customer experience are more likely to generate better long-term returns for shareholders.
Impact on Industries:
The rapid growth of unclaimed deposits directly impacts India’s banking industry:
- Public Sector Banks: These banks face technology and process gaps that make it challenging to keep account holder data current after long periods of inactivity. They must modernize their legacy systems and leverage advanced analytics to identify at-risk accounts.
- Private Banks: Private banks also need to examine why their superior digital banking platforms cannot prevent some accounts from being abandoned by users over time. Enhancing engagement policies for infrequently used accounts may be necessary.
Both public and private banks must increase transparency regarding unclaimed deposit metrics for investors to assess operational risks associated with specific institutions based on their exposure to unclaimed deposits.
Indirectly, the growth in dormant accounts reduces efficiency for account aggregators and fintech payment processors relying on banks for verifiable user data. Analytics firms are also affected if inaccurate user information impedes the development of competitive financial product recommendations and predictions.
Long-Term Benefits and Negatives:
Over the long term, the rapidly expanding unclaimed deposits present both risks and opportunities for India’s banking system:
- Risks: Banks that fail to make progress in reducing the growth of idle accounts may face mounting reconciliation issues and potential errors in tracking ownership and heir claims over decades.
- Opportunities: Positive outcomes are possible if banks invest in upgrading their legacy systems, attract top technology talent, and integrate sophisticated account analytics. Banks adopting leading practices could gain significant competitive advantages.
For the overall economy, reducing unclaimed deposits can enhance efficiency for account aggregators, payment firms, data analytics companies, and others, creating a multiplier effect that promotes financial inclusion and innovation. If banks can properly maintain even low-activity accounts, it can gradually build trust and confidence in the banking system, attracting more savings into the formal economy over the very long term.
Short-Term Benefits and Negatives:
In the near term, until 2025, the rapidly growing unclaimed deposits have limited financial impact but pose certain consumer trust risks for India’s banking sector:
- Limited Direct Impact: With unclaimed deposits currently accounting for less than 1% of banking assets, the direct profitability impact is small. However, high growth rates, if left unchecked, could lead to significant absolute amounts over the years.
- Perception Issues: Banks reporting unusually high unclaimed deposit balances may encounter perception issues from customers questioning their database management competencies for inactive accounts.
- Delays in Reclaiming Deposits: For citizens, delays in reclaiming family deposits after heir claims processes could moderately rise, potentially requiring legal assistance.
Therefore, investors and consumers should monitor bank-level disclosures on unclaimed deposit exposure. Banks with advanced analytics in place to predict, identify, and notify inactive account holders before balances reach mandatory public reporting thresholds are better positioned for the coming years.
Companies Impacted by Rising Unclaimed Deposits in Indian Banks:
Indian Companies Potentially Gaining:
- Government of India: The increase in unclaimed deposits translates to more funds at the government’s disposal. These funds can be utilized for public welfare initiatives, infrastructure development, or debt reduction, potentially boosting market sentiment for government bonds.
- Wealth Management Companies: Increased awareness around unclaimed deposits might encourage individuals to track their dormant accounts and invest wisely. This could benefit wealth management companies offering portfolio management services and financial planning solutions.
- FinTech Companies: Companies developing platforms to help individuals track and claim their unclaimed deposits could see increased demand for their services.
- Credit Information Bureaus: Improved tracking of dormant accounts and enhanced information sharing about unclaimed deposits might benefit credit information bureaus like CIBIL and CRIF by providing more complete financial data profiles.
Indian Companies Potentially Losing:
- Banks: While banks earn interest on unclaimed deposits, rising unclaimed amounts increase their administrative burden and compliance costs associated with tracking and managing these funds. Additionally, negative publicity around unclaimed deposits might affect brand image and public perception.
- Small Private Banks: Smaller banks with limited reach and resources might face greater challenges in identifying and informing dormant account holders, potentially leading to a higher proportion of unclaimed deposits compared to larger banks.
- Global Asset Management Companies: Increased wealth in the hands of the government could potentially attract investments from global asset management companies managing sovereign wealth funds and other large investment portfolios.
- Global Technology Companies: Companies offering technology solutions for unclaimed deposit tracking and claim management could see opportunities in the Indian market if the government implements initiatives to address this issue.
Global Companies Potentially Losing:
- Global Retail Banks: If India implements stricter regulations or simplifies procedures for claiming unclaimed deposits, it could lead to faster repatriation of such funds, potentially reducing the amount available for global retail banks operating in the country.
The overall market sentiment could be mixed. While government gains and potential opportunities for certain sectors like wealth management and FinTech might be viewed positively, the impact on banks and the potential reputational risks might raise some concerns. The government’s response and future initiatives to address unclaimed deposits will play a crucial role in shaping the long-term market sentiment.
Disclaimer: This analysis is based on limited information and should not be considered definitive financial advice.
Source: “Unclaimed Deposits with Banks up 28%.” Economic Times, 20 Dec. 2023.