In recent meetings with banking officials, representatives from the Reserve Bank of India discussed how the increasing engagement in financial markets has altered the composition of bank deposits, which are now increasingly drawn from institutions like mutual funds rather than lower-cost individual household savings, according to sources familiar with the discussions.
The RBI, which also serves as the country’s financial regulator, inquired from banks what further actions could be taken to entice large deposits to match loan growth, said the sources, who asked for anonymity due to the private nature of the talks. These discussions may lead to regulatory adjustments regarding the types of new products that could be offered, they indicated.
The RBI did not reply to an emailed request for comments.
While this issue has been raised in previous years, the urgency to find a unified solution has noticeably increased, according to the sources. Banks are experiencing mounting liquidity management pressure as they are lending significantly more rapidly than they are gathering deposits.
As of March 15, Indian banks reported a deposit growth of 10.8% year-on-year, while total loans rose by 13.8% during the same timeframe, based on RBI data. Additionally, the interest rates on banks’ certificates of deposits have risen this year in comparison to the RBI’s lending benchmark, reflecting heightened wholesale funding costs for commercial lenders.
Following the central bank’s policy review in February, the RBI conducted internal policy meetings across departments to address the structural issues that contribute to elevated funding costs for commercial banks, as well as their high credit-deposit ratios, according to one of the informed sources.
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Leading up to this month’s policy review, senior RBI officials engaged with senior bank executives to evaluate the current situation, as reported by the sources. During these meetings, some bankers expressed the necessity for enhanced fundraising instruments and methods, according to those familiar with the discussions.
One significant recommendation involved allowing banks to offer lower deposit rates to financial institutions while providing higher rates to other depositors, including retail clients and non-financial companies, according to the sources. This change would enable lenders to accommodate regulatory costs and attract more stable deposits. Currently, Indian banks can only vary rates based on the size of the deposit.
Additionally, banks explored the introduction of more innovative deposit types, some of which enjoy popularity worldwide, as noted by the sources. Examples could include notice deposits—allowing funds to be withdrawn after customers notify the banks within agreed notice periods—and deposits with rates tied to market returns.
For years, household financial savings in India have gradually shifted from bank accounts into equities and mutual funds, which typically offer returns significantly higher than traditional fixed deposits. The recent talks between the RBI and banks highlight the seriousness of the situation, as some lenders have resorted to selling portfolios of retail loans to enhance their credit-deposit ratios. Bank executives have also publicly discussed the challenges faced.
While some capital has returned to banks through deposits from asset managers and other financial institutions, these inflows are seen as less stable and necessitate higher regulatory buffers. This trend has resulted in the country’s banks having fewer resources available for deployment in assets such as loans and investments, the RBI reportedly noted, a situation that could ultimately jeopardize India’s growth aspirations.
