RBI Governer Raised Red Flag on Bank’s Deposit Growth

Reserve Bank of India (RBI) Governor Shaktikanta Das expressed concerns about the widening gap between credit and deposit growth as household savings increasingly shift away from traditional deposits. He urged banks to adopt new strategies to attract deposits and manage liquidity risks effectively.

Das noted that households, which traditionally relied on banks for saving and investing, are now turning more to capital markets and other financial intermediaries. He stated, “While bank deposits remain dominant as a percentage of financial assets owned by households, their share is declining. Households are increasingly allocating their savings to mutual funds, insurance funds, and pension funds.”

He acknowledged that banks are trying to bridge the credit-deposit gap by increasing their reliance on sources like short-term borrowings and Certificates of Deposit. However, he cautioned that this approach heightens sensitivity to interest rate movements and poses liquidity risk management challenges.

“The shift in deposit preferences from current account and savings account (CASA) deposits has various implications which banks need to keep in mind. With credit growth remaining strong, banks need to continuously focus on improving and refining their credit underwriting standards and pricing of risks,” Das said.

Reflecting on the 2023 banking crises in advanced economies, Das emphasised the importance of robust liquidity management and prudent interest rate risk strategies. He mentioned that the RBI is reviewing the Liquidity Coverage Ratio (LCR) framework to better address emerging issues, stressing that banks must manage their interest rate risk exposures with processes and systems tailored to their business models and risk profiles.

In an era of rapid digitalisation, Das highlighted the growing threat of cyberattacks on financial institutions. He stressed the need for banks to invest in resilient IT systems and improve their governance arrangements. “The Reserve Bank’s supervisory assessments continue to stress the importance of improving Information Technology governance arrangements,” he stated.

The RBI governor also expressed concern over the rise in digital frauds, particularly those involving social engineering attacks and mule bank accounts. He urged banks to strengthen their customer onboarding and transaction monitoring systems and to collaborate closely with law enforcement agencies to curb these activities.

Addressing the trend of outsourcing by banks, Das emphasised the necessity of strong oversight and governance mechanisms. He also discussed the risks associated with the increasing share of unsecured retail credit in banks’ portfolios, urging banks and Non-Banking Financial Companies (NBFCs) to exercise prudence in setting limits on unsecured exposures and avoid exuberant practices.

Speaking about the central bank’s relationship with the government, Das stated that it has been “smooth” throughout his nearly six-year tenure. He attributed the close coordination between the two entities as a key factor in the swift economic recovery following the pandemic and added that there were no expectations for RBI to act as a “cheerleader” for the government.

“From my experience, nobody expects the RBI to be a cheerleader,” Das commented, addressing a specific question regarding a concern raised by one of his predecessors in a recent book. When asked about the possibility of a new term at Mint Road, Das said he was entirely focused on his current role and not thinking beyond that at the moment.

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