Das has no more tricks up his sleeve in war for deposits save art of persuasion

In the monetary policy statement on 8 August, RBI governor Shaktikanta Das touched upon the deposit challenge for the second time in less than three weeks. He said alternative investment avenues were becoming more attractive to retail customers and proving to be a challenge for banks on the funding front.

Although the gap between deposit and credit growth has shrunk in the past couple of fortnights, there still remains a difference in growth rates. While deposits grew at 10.6% year-on-year (y-o-y) as on 26 July, non-food credit growth was at 13.7%.

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“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," said Das.

Asked if there was anything else the regulator could do, Das said during the press conference on 8 August that the RBI trusts “the judgement and the risk management systems in the banks."

“...so we do not want to do micromanagement for the banks," Das said.

Experts said that since deposit interest rates are no longer regulated by the RBI, it can perhaps make clear its discomfort with the high loan-to-deposit ratio. Loan-to-deposit or credit-deposit ratio indicates how much of a bank’s deposit base is utilised for loans. This was at 80% in FY24, at its highest since 2005, when this ratio became available.

Slowing credit growth

“The RBI can, however, issue guidelines that directly impact the lending side, so that loan and deposit growth can align," said Anil Gupta, senior vice-president and co-group head of financial sector ratings at Icra Ltd. “There could be some slowdown in credit growth as the regulator is repeatedly expressing concerns around the gap in deposits and credit, although some of it will also stem from the proposed tightening of liquidity coverage ratio norms."

Before the RBI gave banks the freedom to set their fixed deposit rates in October 1997, the regulator used to prescribe rates and maturities on deposits that banks were allowed to offer. Fourteen years later, the RBI allowed banks to also set their savings deposit rates.

While term deposit rates have moved up across the banking system, savings deposit rates have remained stagnant over the past few years. As on 1 September 2023, savings deposit rates of five major banks were in the range of 2.7-3%, unchanged since FY21, as per yearly data released by the RBI in its Handbook of Statistics on Indian Economy. It showed that banks paid up to 4% on savings deposits from FY12 to FY19.

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Fixed or term deposit rates are still lower than pre-covid rates. The weighted average interest rate on fresh bank deposits was 6.88% in June 2019 and is at 6.46% five years later. The stagnation in bank deposit rates, coupled with greater financial literacy on investment options, experts said, could have pushed customers away from parking substantial funds with banks.

Some said there is no quick fix – banks will have to use their vast branch networks to attract customers who are increasingly finding avenues that offer higher returns. Banks could look at differentiated deposits, given that the RBI is also pushing them to innovate on the deposit front. 

According to Aniket Dani, director of research at Crisil Market Intelligence and Analytics, banks could look at offering higher credit limits on loans against deposits.

“This is where, due to net off between the borrowing and deposit rates, banks can attract customers, leading to longer term deposits," said Dani. “Banks can focus on offering customised deposits to different cohorts, for example, senior citizens and small family businesses, holding high value deposits of ₹2-3 crore (are) where high single digit rates can be offered for long-term deposits."

Infusing liquidity

The interest rate deregulation means the RBI cannot direct banks to make deposits more attractive. However, a senior economist suggested that the RBI can look at tweaking system liquidity, which would have an impact. 

“To assuage liquidity, a permanent infusion of funds through a CRR (cash reserve ratio) cut or OMO (open market operations) could infuse a large amount into the system which can then be used by banks for lending purposes while keeping in mind the caveats the RBI has been talking about in terms of over-extension of credit," said Madan Sabnavis, chief economist at Bank of Baroda.

Also Read: If deposits are stuttering, how will banks manage the credit boom?

At 4.5% of deposits currently, CRR is the amount of money banks need to park with the RBI at zero interest as a buffer in emergencies. OMO is used to manage liquidity conditions.

According to Karan Gupta, director and head of financial institutions at India Ratings & Research, there is a shift in the profile of people’s savings from deposits to financial investments such as mutual funds, investment products and insurance. The RBI, Gupta said, already has measures such as CD ratio and LCR (liquidity coverage ratio) that it monitors to keep things in check.

“If deposit growth continues to lag advances growth, more nudges can be expected from the RBI before it actually takes any regulatory action."