'Speed up deposit mobilisation efforts'

Drawing lessons from the Northern Rock collapse in the UK, the Reserve Bank of India today advised banks to avoid excessive dependence on borrowings and instead focus on deposit mobilisation.

The central bank's observation also came due to its assessment that the growth rate in corporate savings may come down in the coming years and there would be limits to which public sector savings would rise. In any case the share of household savings in aggregate deposits is falling.

"As the economy expands and the demand for funds increases, banks at times may find their deposit resources to be insufficient for meeting the growing demand, thereby encouraging them to raise funds by way of borrowings. Going by the Northern Rock experience, heavy borrowing by banks has serious implications, especially during financial distress, and, therefore, too much reliance on borrowings needs to be avoided," RBI said .

 

Instead, it asked asked banks to focus on untapped savings and improve their services to attract and retain depositors. It also asked them to widen their deposit base by exploring new opportunities like emphasising on inclusive growth and financial inclusion.

The central bank, in addition, pointed out that bank faced intense competition from other financial instruments, such as brokerages, asset management companies and mutual funds in accessing deposits.

It suggested that banks expand their ambit of specialised financial services to extend their outreach to prospective depositors by redesigning and repackaging their products to suit individual need. For this, banks will have to enhance their skill enhancement at all levels. Public sector banks need to revamp their compensation structure as they face more challenges from both private and foreign banks.

Further to this it asked banks to continue its focus on deposits. Therefore, banks need to review their business strategies regularly to be in a position to combine longer term viable financing with profitability in operations.

The RBI report said that to tap the changing employment and demographic patterns banks need to reorient their role as financial intermediaries. It asked banks to focus on mobilising surplus resources from a younger age profile of savers.

It also asked banks to step up efforts to access rural savings to raise the overall resource mobilisation. RBI asked banks to reap the benefits of low cost large deposit base, which is not available to other financial intermediaries.