Banks Should Use Interest Rates To Make Deposits Attractive, Says Finance Minister

Finance Minister Nirmala Sitharaman encouraged banks to explore new ways to attract deposits, as household savings are increasingly shifting towards alternate investment products.

There is a mismatch between credit and deposit growth presently, she told the media after her post Budget address at the 609th meeting of the Central Board of Directors of the Reserve Bank of India, in New Delhi.

She interacted with the directors in the Central Board, outlined the vision of the Union Budget 2024-25, its focus areas and the expectations from the financial sector. The Finance Minister also underlined the priorities for ‘Viksit Bharat’.

"Both RBI and the government have been asking banks to focus on their business activity...they should be aggressive in deposit mobilisation and then lend. That is the core activity of banks," she said.

Stressing that banks should give emphasis on collecting deposits, she said, "RBI has given them some liberty in managing the interest rates. Using that liberty, they should make deposits attractive...bring innovative products and mobilise deposits."

She also urged bankers to focus on small savers rather than bulk deposits.
"Trickles (small savings) are going to be your bread and butter, money to bank on...that trickle which was the emphasis long back, which kept nothing for the other side (big deposits). Now we've (banks) gone to the other side completely. Now they are chasing bulk deposits to meet their targets," she said.

But the requisite small deposit mobilisation is one of the very critical jobs of a bank, she said, adding "it might be grinding monotony, but that's where your bread and butter lies."

Echoing a similar view, RBI Governor Shaktikanta Das said, "We have been witnessing about 300 to 400 basis points gap between deposits and credit growth, deposits are lower. So at the moment, our effort is to highlight this point. It is kind of a proactive caution for the banks' management that going forward, this may create structural issues with regard to liquidity management.

"As it stands today, we don't see a crisis. But it has to be attended to. Banks should leverage their vast branch network to mobilise deposits through innovative means and products," he emphasised.

He further said interest rates are deregulated and often banks raise deposit rates to attract funds.

Asked if any policy intervention is required to bolster deposit growth, Das said, "India has deregulated interest rates and if you back on regulating deposit and credit rate, it can be retrograde and distort the market." RBI Governor, while unveiling the bi-monthly monetary policy earlier in the week, also had expressed concern of deposit-lending mismatch in the banking sector.

He had said that banks were taking greater recourse to short-term non-retail deposits and other instruments of liability to meet the incremental credit demand.

This may potentially expose the banking system to structural liquidity issues, he has said. "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."

Sitharaman was accompanied by Minister of State Pankaj Chaudhary, T V Somanathan, Finance Secretary and Secretary, Department of Expenditure, Tuhin Kanta Pandey, Secretary, Department of Investment and Public Asset Management and other senior officials.

The Board also reviewed the global and domestic economic situation and outlook, including the challenges posed by geopolitical developments and global financial market volatility.

Deputy Governors Michael Debabrata Patra, M Rajeshwar Rao, T Rabi Sankar, Swaminathan J and other Directors of the Central Board—Satish K Marathe, S Gurumurthy, Revathy Iyer, Sachin Chaturvedi, Anand Gopal Mahindra and Pankaj Ramanbhai Patel—attended the meeting.

Ajay Seth, secretary, Department of Economic Affairs, also attended the meeting.

(With inputs from PTI).