Banks should offer innovative products, service to garner deposits: Das

Reserve Bank of India (RBI) governor Shaktikanta Das on Thursday asked banks to offer innovative products and service offerings, and leverage their branch networks to attract household financial savings as deposits at a time when there is a divergence in the growth of credit and deposit of banks.

In the post monetary policy interaction with the media, Das highlighted that alternative investment avenues are becoming more attractive to retail customers and banks are facing challenges on the funding front with bank deposits trailing loan growth.

This has resulted in banks resorting to short-term non-retail deposits and other instruments of liability, especially certificates of deposits, to meet the incremental credit demand.

“This may potentially expose the banking system to structural liquidity issue,” said Das, adding that 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.

However, the governor did not give any specific instructions as far as interest rates on deposits are concerned.

“Lending and deposit rates are deregulated. Depending on the overall economic situation, financial conditions prevailing, and individual bank’s position on deposits (how much they have, composition of deposits, loan growth), it is for the banks to decide on the deposit rates and they will have to take a call,” Das said.

Garnering deposits is increasingly becoming a major concern for banks amid a rising trend of households looking at deploying their savings in equity markets. Major banks, including HDFC Bank, State Bank of India, and Bank of Baroda among others, have increased interest rates on term deposits to garner more funds to support credit growth. Many others are resorting to raising money through capital markets via infrastructure bonds, with the issuances of such instruments seeing an upward trend.

The RBI Governor has frequently expressed concern about the sluggish pace of deposit growth of Indian banks. Last month, he had highlighted that the deposit growth outpacing credit growth could potentially pose risks to the financial system.

“While there could be a debate regarding ‘deposits funding loans’ vis-à-vis ‘loans funding deposits’, the current regulatory concern stems from the fact that there could be structural changes happening which banks need to recognise and, accordingly, devise their strategies,” Das said, adding that with credit growth remaining strong, banks need to continuously focus on improving and refining their credit underwriting standards and pricing of risks.

Previously, in a meeting with chief executive officers (CEOs) of public and private sector banks, Das had also highlighted the persistent gap between credit and deposit growth and instructed banks to re-strategise business plans.