Banks Turn to Alternative Sources as Deposit Growth Slows, RBI Reports

Banks are increasingly turning to commercial paper and certificates of deposit due to slower deposit growth compared to credit growth, according to the RBI's August Bulletin. Certificates of deposit issuances reached Rs 3.49 lakh crore by August 9, 2024, significantly up from Rs 1.89 lakh crore during the same period last year. This shift is attributed to the lag in deposit growth behind credit expansion.

Commercial Paper Issuances Surge

Commercial paper issuances also saw a rise, hitting Rs 4.86 lakh crore by July 31, 2024, compared to Rs 4.72 lakh crore in the previous year. This increase was driven by higher borrowings from non-banking financial companies (NBFCs) in the CP market. The RBI article highlighted that banks are relying more on short-term non-retail deposits and other liability instruments to meet growing credit demand.

Reserve Bank Governor Shaktikanta Das expressed concerns about household savings shifting towards alternative investments. He urged banks to mobilise deposits through innovative products and services, leveraging their extensive branch networks. "This may potentially expose the banking system to structural liquidity issues," he noted.

Finance Minister's Call for Action

Finance Minister Nirmala Sitharaman also voiced concerns over slow deposit mobilisation. She urged banks to make concerted efforts to attract deposits, noting that deposits have been growing 300-400 basis points lower than credit growth in recent months, leading to an asset-liability mismatch for banks. Sitharaman advised public sector banks (PSBs) to improve customer relationships for better service delivery.

In the fixed income segment, domestic bond yields eased sharply. This positive sentiment followed the inclusion of Indian government securities (G-sec) in the global bond index, a lower gross fiscal deficit-GDP ratio budgeted, and reduced market borrowing requirements announced in the Union Budget 2024-25.

System Liquidity Remains in Surplus

The bulletin noted that system liquidity remained in surplus during July and August due to increased government spending, currency returning to the banking system, and the Reserve Bank's forex operations. The average daily net absorption under the liquidity adjustment facility (LAF) rose to Rs 1.52 lakh crore from July 16 to August 15, 2024.

Banks are encouraged to use their vast branch networks creatively to mobilise more deposits. The RBI's focus on alternative funding sources highlights a strategic shift as traditional deposit growth lags behind credit expansion.

The bulletin underscores the need for banks to balance their funding strategies carefully. As they turn more towards short-term instruments, they must be mindful of potential structural liquidity issues that could arise from this approach.