Reserve Bank of India Engages with Commercial Banks to Stimulate Deposit Growth

Reserve Bank of India Seeks Solutions to Stabilize Bank Deposits

The Reserve Bank of India (RBI) is holding meetings with commercial lenders to discuss ways to attract larger and more stable deposits, as a shift in household savings into equities and other investment products threatens to impact the country's banks.

According to people familiar with the matter, the RBI has been discussing how the growing participation in financial markets has changed the nature of bank deposits. The people, who requested anonymity because the talks were private, stated that the RBI asked banks what more could be done to attract large deposits to keep pace with loan growth. The discussions may pave the way for regulatory changes on the type of new products that can be offered.

The RBI has been seeking input from banks on how to manage liquidity, as they are lending significantly faster than they are accumulating deposits. This has led to a record share of deposits being allocated to lending.

Deposit Growth Comparison

| Quarter | Deposit Growth (YoY) | Loan Growth (YoY) | | --- | --- | --- | | March 15 | 10.8% | 13.8% | | (Previous period not specified) | | |

Indian banks' deposit growth stood at 10.8% year-on-year as of March 15, while their total loans expanded 13.8% over the same period, according to RBI data. Additionally, rates on banks' certificates of deposits have climbed this year relative to the RBI's lending benchmark, reflecting higher wholesale funding costs for commercial lenders.

Following the central bank's February policy review, the RBI held internal policy meetings across departments to discuss the structural issues leading to higher cost of funds for commercial banks as well as their elevated credit-deposit ratios. Senior RBI officials met with senior bank executives to discuss the situation in the run-up to this month's policy review.

Some bankers suggested that banks be allowed to offer lower deposit rates to financial institutions, and higher ones to other depositors including retail customers and non-financial companies. This would enable lenders to adjust for the regulatory costs and attract more stable deposits. Currently, Indian banks can differentiate rates only by the size of the deposit.

Banks also discussed introducing more innovative deposit types, some of which are popular globally. These could include notice deposits, where funds can be withdrawn after customers inform the banks during specific pre-agreed notice periods, and deposits whose rates are linked to market returns.

For years now, household financial savings in India have increasingly migrated from bank accounts into equities and mutual funds, whose returns are far higher than traditional fixed deposits. The latest RBI talks with the banks underscore the gravity of the situation, which has led some lenders to sell portfolios of retail loans to improve their credit-deposit ratios. Bank executives have also spoken publicly about the challenges.

Some of the money has returned to banks via deposits from asset managers and other financial institutions, but such flows are considered less stable and require higher regulatory buffers. The shift has left the country's banks with fewer funds to deploy in assets including loans and investments, the RBI is said to have noted, a trend that could ultimately undermine India's growth ambitions.