RBI Governor Sounds Caution On Low Bank Deposit Growth

Banks need to recognise changing preferences among depositors and enhance their deposit aggregation, Reserve Bank of India Governor Shaktikanta Das said on Friday.

"Deposit mobilisation has been lagging credit growth for some time now. This may potentially expose the system to structural liquidity issues," Das said at a banking summit organised by The Financial Express."...There could be structural changes happening which banks, NBFCs (non bank financial companies) and other lenders need to recognise and accordingly devise their strategies."

In his speech, Das noted that households and consumers who traditionally leaned on the banking system for their savings needs are increasingly moving money towards capital markets and other intermediaries.

"On their part, banks have sought to fill the credit-deposit gap by increasing their reliance on other sources like short term borrowings, certificates of deposits, etc.," he said, adding that such moves may expose lenders to further interest rate risks.

Customer preference to move funds out of their current account savings account deposits may pose structural challenges for lenders, which they need to keep in mind, the RBI Governor said.

According to the latest fortnightly data released by the central bank, non-food credit growth stood at 17.3%. This growth includes the impact of the merger between HDFC Bank Ltd. and Housing Development Finance Corp. which happened on July 1, 2023. In comparison, deposit growth is lagging at 11%.

It is imperative that our banks put in prudent liquidity management measures proactively, the RBI Governor said.

Separately, Das highlighted that the regulator had recently raised the issue of mule accounts with bank chief executive officers at a meeting. Such accounts are seen to have a sudden spurt in activity at odd hours, which needs to be monitored and checked for illegal activity. Such accounts may pose operational, as well as reputational challenges for banks, he said.

Das also pointed out that microfinance lenders and other regulated entities must exercise their freedom more responsibly. The regulator has noticed certain lenders employing usurious interest rates to microfinance borrowers, which needs to be curtailed.

Unfair or usurious practices on microfinance loans will compel the regulator to review its regulatory framework, he said.

The RBI had removed the interest rate ceiling on microfinance loans, allowing lenders to determine their own interest rates in 2022. This came nearly a decade after it had placed such limits on microfinance lenders after the Andhra Pradesh crisis.