FM Sitharaman urges banks to boost deposits as lending surges, warns of liquidity risks

Finance minister Nirmala Sitharaman on Saturday urged banks to return to their core focus of deposit mobilization and lending, emphasizing the need to balance these two critical elements of the banking business.

Addressing the media after attending the 609th meeting of the Reserve Bank of India's central board of directors, Sitharaman likened deposits and lending to the two wheels of a cart, noting that "deposit collection is moving slowly." Central bank governor Shaktikanta Das and other board members were also present.

Read this | Indian banks are battling the worst deposit crunch in 20 years

It's important for banks to return to the traditional approach of deposit collection, she said, urging financial institutions to develop innovative and attractive schemes to draw in funds from the public.

Sitharaman also indicated plans to meet with the heads of private and public sector banks soon to further discuss strategies for boosting their deposit base, in addition to assessing their performance on priority sector lending and other financial inclusion initiatives.

The finance minister’s concern over deposit growth follows a noticeable slowdown in this area, even as lending has accelerated in response to increased demand for funds across various sectors. The Reserve Bank of India (RBI) has also flagged the issue, raising concerns over the sluggish pace of deposit mobilization.

When asked whether policy measures were needed to stimulate deposit growth, governor Das said that interest rates were deregulated, making it inappropriate to interfere with market mechanisms. 

Banks are free to raise rates for shorter durations, Das said, highlighting a common strategy banks employ to attract deposits.

Earlier this week, while unveiling the bi-monthly monetary policy, Das expressed concern over the growing mismatch between deposits and lending in the banking sector. He pointed out that banks have increasingly relied on short-term, non-retail deposits and other liability instruments to meet rising credit demand, which could potentially expose the banking system to structural liquidity risks.

"Banks may, therefore, focus more on mobilizing household financial savings through innovative products and service offerings, and by fully leveraging their vast branch networks," Das advised.

More here | Shaktikanta Das and the brewing challenge of slowing bank deposits

He also urged banks to modernize their deposit-taking processes by integrating technology, noting that while lending has gone digital, deposit mobilization continues to rely on outdated methods that need reform.

The decline in low-cost deposits, or CASA (current account, savings account), has been particularly notable. Public sector banks’ CASA levels, which peaked at 45% of total deposits in 2022, have since fallen to around 40.5% this year. This drop, coupled with a rise in credit outflows, has drawn the central bank’s attention, prompting calls for banks to address the widening gap between credit and deposit growth.

Also read | If deposits are stuttering, how will banks manage the credit boom?

According to India Ratings, deposit growth for the banking system is expected to moderate to 12-13% in FY25, down from 13.8% in FY24, intensifying competition for deposit accretion, especially for low-cost CASA deposits.