Banks should offer innovative products, services to garner deposits: Das

This nudge comes amid sluggish deposit growth, which has led to a widening gap between credit and deposit growth

Reserve Bank of India (RBI) governor Shaktikanta Das on Thursday asked banks to offer innovative products and services and effectively use their branch networks to attract household savings as deposits, amid increasing appeal of alternative investment avenues to retail customers.

This nudge from the regulator comes amid sluggish deposit growth, which has led to a widening gap between credit and deposit growth and heightened concerns about banks’ liquidity management.

In the post monetary policy interaction, Das highlighted that alternative investment avenues are becoming more attractive to retail customers and banks are facing challenges on the funding front with bank deposits trailing loan growth.

 

This has resulted in banks resorting to short-term non-retail deposits and other instruments of liability, especially certificates of deposits, to meet the incremental credit demand.

“This may potentially expose the banking system to structural liquidity issue,” Das said, adding that banks may, therefore, focus more on mobilisation of household financial savings through innovative products and service offerings and by leveraging fully on their vast branch network.

However, the governor did not give any specific instructions as far as interest rates on deposits are concerned.

“Lending and deposit rates are deregulated. Depending on the overall economic situation, financial conditions prevailing, and individual bank’s position on deposits (how much they have, composition of deposits, loan growth), it is for the banks to decide on the deposit rates and they will have to take a call,” Das said.

Garnering deposits is increasingly becoming a major concern for banks amid a rising trend of households looking at deploying their savings in equity markets.

Major banks, including HDFC Bank, State Bank of India, and Bank of Baroda among others, have increased interest rates on term deposits to garner more funds to support credit growth while many others are tapping capital markets via infrastructure bonds to raise funds for deployment.

Amid sluggish growth on the liabilities front, banks are increasingly becoming wary of their high credit-deposit (CD) ratio. HDFC Bank, which has a very high CD ratio due to HDFC Ltd.’s merger with the bank, has guided that it will be looking to bring down its high CD ratio to pre-merger levels by growing its advances slower than its deposits.

“For the RBI, a high CD ratio of the banking system had been of some concern, and it could be true that the RBI would want to see the CD ratio come down to more reasonable levels before easing monetary policy,” said Indranil Pan, Chief Economist at YES Bank.

The RBI governor has frequently expressed concern about the sluggish pace of deposit growth of Indian banks. Last month, he had highlighted that the deposit growth outpacing credit growth could potentially pose risks to the financial system.

“While there could be a debate regarding ‘deposits funding loans’ vis-à-vis ‘loans funding deposits’, the current regulatory concern stems from the fact that there could be structural changes happening which banks need to recognise and, accordingly, devise their strategies,” Das said, adding that with credit growth remaining strong, banks need to continuously focus on improving and refining their credit underwriting standards and pricing of risks.

Previously, in a meeting with chief executive officers (CEOs) of public and private sector banks, Das had also highlighted the persistent gap between credit and deposit growth and instructed banks to re-strategise business plans.