Concerned about the slower growth in bank deposits vis-à-vis an uptick in lending, Finance Minister Nirmala Sitharaman made a strong pitch on Saturday for banks to find novel ways to attract deposits, advocating a return to the ‘old-fashioned approach’ of raising small sums from many savers rather than pursuing bulk corporate deposits that indicate ‘very lazy’ banking.
Reserve Bank of India (RBI) Governor Shaktikanta Das said the regulator has been highlighting this issue with banks, referring to a 300-400 basis points gap observed between deposit and credit growth for the last few months, with deposits lagging behind. One basis point equals 0.01%.
“As it stands today, we do not see a crisis or anything. It has to be attended and dealt with by the individual banks. If it goes on like this unattended, it can lead to a potential structural liquidity management issue. So it’s a kind of advance cautioning of the banks,” he said after a meeting of the central bank’s board with the Finance Minister.
Ms. Sitharaman said that the RBI and the government have been repeatedly telling banks to pay a little more attention on their core business activity of deposit mobilisation and lending.
“It is not that they are not paying attention, but they must make more concerted efforts to raise deposits and then lend as well because this is the core activity of banking… after that, you can add four-five other new things to your portfolio. But if in the core business – deposit collection and lending money – if one of the wheels is not functioning effectively, you need to heed it,” she said.
The minister said she will urge bank chiefs, whom she will be meeting soon, to go back to collecting deposits the old-fashioned way from everybody, using the liberty they have in managing interest rates.
“I think huge big deposits have always been a very lazy banker’s job. ‘Nice. I’ve got a big deposit that’s going to take a whole lot of things, but the trickles, which come are the ones which are going to be your bread-and-butter money to bank on lending regularly. That trickle was the emphasis long time ago in deposit mobilisation, which cared nothing for the other side,” she observed.
“Now we’ve gone over this side completely, [get] big deposits and meet my manager’s target,” she remarked, adding that securing small deposits is a very critical job of a bank though it might entail “grinding monotony”.
Mr. Das weighed in on this and added that the RBI has been flagging to bank managements that “high value deposits’ flight can be very fast”. The share of CASA deposits in overall deposits has come down to about 39% from 43% about a year ago, so banks need to focus more on all deposits, not just some bulk deposits, he averred.
“Through the Budget speech and the discussions on it, it was said many times that today, even households who were investing in small savings, have found many new avenues, be it the stock market or other options, that provide them better returns. This is why retail investments in markets have gone up. When they have so many new options before them, banks should also consider new, innovative portfolios to mobilise deposits by making them attractive,” Ms. Sitharaman underlined.
Mr. Das also pointed out that credit lending had become digital triggering very fast growth in lending, but deposit mobilisation was still in the physical mode. “So there is a kind of a structural change which has happened in the economy, and banks will have to come out, therefore, with innovative approaches to mobilize deposits,” he concluded.