Choosing Between Two Deposit Mobilisation Incentives
A branch plans to raise incremental retail term deposits over the next 12 months. Scheme A offers 7.25% p.a. to customers and a one-time staff incentive of 0.50% of incremental deposits; its campaign cost is ₹1.5 lakh, and the branch expects an average incremental balance of ₹4.5 crore. Scheme B offers 7.75% p.a., no staff incentive, and a campaign cost of ₹3 lakh; it is expected to raise an average balance of ₹5.2 crore. The bank can deploy the funds at a gross yield of 8.75% p.a. Both schemes assume the deposits stay for the full 12 months and that the incentive is paid once on the average balance. A junior officer compares only the customer rates and says Scheme A is cheaper. The branch head asks for a net interest income calculation and a break-even check before approving the campaign.
1. Compute the 12-month net interest income after direct costs for each scheme.
Read the worked answer
Use: net contribution = (deployment yield − customer rate) × average balance − staff incentive − campaign cost.
Scheme A
- Spread = 8.75% − 7.25% = 1.50% p.a.
- Gross spread income = 1.50% × ₹4.5 crore = ₹6,75,000
- Staff incentive = 0.50% × ₹4.5 crore = ₹2,25,000
- Campaign cost = ₹1,50,000
- Net = 6,75,000 − 2,25,000 − 1,50,000 = ₹3,00,000
Scheme B
- Spread = 8.75% − 7.75% = 1.00% p.a.
- Gross spread income = 1.00% × ₹5.2 crore = ₹5,20,000
- Campaign cost = ₹3,00,000
- Net = 5,20,000 − 3,00,000 = ₹2,20,000
Scheme A is better by ₹80,000 over 12 months, despite the staff incentive, because its spread is 50 basis points wider and its campaign cost is lower.
2. Calculate the average incremental balance at which Scheme B becomes equal to Scheme A, and interpret the result.
Read the worked answer
Let B be Scheme B's average incremental balance in rupees. Scheme B's net contribution is 0.01B − 3,00,000. Set this equal to Scheme A's ₹3,00,000:
0.01B − 3,00,000 = 3,00,000 0.01B = 6,00,000 B = ₹6,00,00,000 = ₹6.0 crore.
Interpretation: Scheme B must raise an average incremental balance of ₹6 crore just to match Scheme A's net contribution. At the expected ₹5.2 crore, B is below break-even and yields ₹2.20 lakh against A's ₹3.00 lakh. Above ₹6 crore, B becomes the better financial choice, assuming the same deployment yield and a full 12-month retention. The junior officer's comparison of customer rates alone is incomplete because it ignores the spread, the staff incentive and the campaign cost.
3. If the expected balance under Scheme B falls to ₹5.0 crore, what should the branch do? Include one non-financial consideration.
Read the worked answer
Recompute Scheme B at ₹5.0 crore: gross spread = 1.00% × ₹5.0 crore = ₹5,00,000; less campaign cost ₹3,00,000 = ₹2,00,000. Scheme A remains at ₹3,00,000, so A is better by ₹1,00,000.
Recommendation: choose Scheme A on the financials, unless the branch has a strategic reason to prefer B. One non-financial consideration is that B's higher customer rate may attract more stable relationship deposits or support a deposit-growth target that carries value beyond the 12-month calculation. The branch could also negotiate B's campaign cost down or set a stretch target above ₹6 crore before switching. If B cannot credibly exceed ₹6 crore, approving it would sacrifice ₹1 lakh of contribution for an uncertain strategic benefit.