Purpose The role of large bank deposits from a small number of customers has dominated the public policy and regulatory discourse. The recent turmoil (in 2023) in the US banking industry shows how a withdrawal by a set of major depositors can be perceived as a red flag and trigger withdrawal contagion, which could propagate bank fragility. On the contrary, it is argued that large deposits can provide a liquidity buffer and significant funding – more money for the bank to lend and invest – albeit at a cost. Moreover, it is argued that these large depositors are better monitors of banks, which act as a market discipline mechanism. In this paper, we examine whether emerging markets like India are exposed to profitability pressures and fragility triggers due to the banks' reliance on large deposits. Design/methodology/approach The study is based on a data set of the entire pool of public and private banks in India for the period from 2013 to 2022 (426 firm-years). Our variable of interest is the large deposit share, which we proxy using a new measure disclosed by banks – the concentration from the top 20 depositors. We use a panel regression model to estimate the impact of large deposits on profitability (net interest margin NIM) and fragility (Z-score). The robustness of the results is confirmed using the generalized method of moments (GMM) framework and applying an alternative fragility measure (loan loss provisions). We find the results to be consistent. Findings Our empirical investigation provides evidence that banks in India could transmit the cost of large deposits into loan pricing, thereby protecting the NIM. On the contrary, we find that these large deposits also contribute to bank fragility due to moral hazard. Our study shows that large depositors have a limited impact on bank monitoring and therefore lack disciplining power – one possible reason being the collateralization effect. Research limitations/implications Our study has not covered the implications of the liquidity coverage ratios (LCRs) and net stable funding ratio (NSFR) implemented by the Reserve Bank of India to reflect any incipient signs of liquidity dry ups. The absence of standard data on the LCR and NSFR limits the exploration of the channel through which deposit concentration affects banks' liquidity and financial stability. This study has implications for promoting financial stability. The study calls for intensive monitoring of large deposits by banks and regulators as part of their liquidity risk assessments. This is especially required in the digital age, where funds can move instantly. Practical implications As policy prescriptions, regulators could take supervisory action when large deposits in a bank cross a threshold – an early-warning signal for any impending liquidity challenges and capital risk. Given the limited deposit-insurance coverage, we recommend mandatory disclosure of deposits at a bank level beyond the insured limit, which would improve transparency. Banks with large deposits from few clients may be required to be kept under the regulatory watch. Originality/value To the best of our knowledge, this is the first study in an Indian context examining the interconnectedness effect of large deposits on the NIM and fragility. We overcome the persistent empirical gap caused by the unavailability of the data on large deposits using top 20 depositors’ share as a sound proxy for large deposits. This variable is a disclosure mandated by the RBI and serves as a scalable solution to overcome the data opacity issues. We showcase the ability of the Indian banks to transmit the high cost of deposits into loan pricing, which may come at the cost of moral hazard. We find that large deposits could trigger fragility. We confirm our results using a two-step approach: first, using the GMM approach under the IV regression framework and second, using an alternative measure of fragility.
Bhusan et al. (Thu,) studied this question.