Synopsis: FM Nirmala Sitharaman urges banks to create innovative deposit schemes to balance the rising credit demand and slow deposit growth, emphasizing the importance of financial stability.
In a recent press conference, Finance Minister Nirmala Sitharaman addressed the growing concern over the imbalance between credit growth and deposit mobilisation within India's banking sector. The press conference followed a significant meeting with the Reserve Bank of India's (RBI) Central Board of Directors, where this issue was a focal point.
Sitharaman emphasized that while credit demand continues to rise rapidly, deposit growth has been sluggish. This growing disparity poses a risk to the financial stability of banks, as they increasingly rely on short-term, non-retail deposits and other instruments to meet the surging credit demand. The finance minister urged banks to return to their core business practices, focusing on attracting deposits through innovative and appealing schemes.
The Core Issue: Slow Deposit Growth vs. Rising Credit Demand
The Indian banking sector is currently facing a crucial challenge—credit growth is outpacing the growth of deposits. According to Sitharaman, "Deposit is moving slowly," which could create structural liquidity issues for banks. To address this, she called on financial institutions to develop new strategies and products that would attract more deposits from the public. This, she believes, would help balance the scales between lending and deposit mobilisation, ensuring the long-term sustainability of banks.
RBI’s Stance and Concerns
RBI Governor Shaktikanta Das echoed these concerns during the joint press conference. He reiterated that interest rates on deposits and lending are deregulated, allowing banks the freedom to adjust these rates as needed to attract more funds. However, the increasing reliance on short-term, non-retail deposits, as opposed to stable, long-term household deposits, could expose banks to liquidity risks.
Das had previously highlighted the need for banks to focus on mobilising household financial savings by offering innovative products and leveraging their extensive branch networks. This approach, he suggested, would provide a more stable and sustainable source of deposits, reducing the reliance on potentially volatile short-term funding.
Government and RBI’s Aligned Vision
The alignment between the government and the RBI on this issue is clear. Both institutions are urging banks to explore creative solutions to stimulate deposit growth. Sitharaman’s challenge to banks to "think outside the vault" is a call to action for financial institutions to innovate in the face of these challenges, ensuring a balanced growth trajectory for both deposits and lending.
As the banking sector navigates these turbulent waters, the push for innovative deposit schemes will likely play a crucial role in maintaining financial stability and supporting India’s broader economic growth.
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