PSBs facing deposit challenges Amidst Untapped Opportunities in Rural Bharat

Ira Singh
Khabar Khabaron Ki,25 Aug’24

Indian banks are facing a significant challenge in growing their deposit bases as customers increasingly explore a range of alternative investment options. The trend is reshaping the financial landscape. As per RBI Bulletin the share of bank deposits is diminishing as households redirect their savings into alternative investment avenues such as mutual funds, insurance, and pension funds. This shift is impacting the banking sector, with deposits failing to keep pace with rising loan growth.As a result, many banks are increasingly relying on short-term non-retail deposits and other liability instruments to meet the burgeoning credit demand.The RBI has consistently highlighted the need for banks to focus on deposit mobilization, cautioning that a sustained imbalance could lead to liquidity stress and impact the cost of funds.

Meanwhile, the report highlightes PSBs’ strong performance in FY24, including a decline in Net NPAs to 0.76%, a capital adequacy ratio of 15.55%,Net Interest Margin (NIM) of the banks at 3.22%, and a record net profit of Rs1.45 lakh crore with the dividend of Rs 27,830 crore to the shareholders.However despite these achievements, the government-owned banks are still facing challenges regarding their deposit base to sustain rising credit demands and ensure the stability of the financial system, according to sources.Sources attribute this struggle to the absence of new branch openings in rural Bharat, where private banks are making significant inroads and attracting more deposits. As rural customers embrace banking services due to increased accessibility, traditional banking still holds sway over them, unlike the urban youth who are inclined towards faster returns through mutual funds.

The notion that equities and mutual funds are eroding bank deposits has gained traction, but the reality is more nuanced. As household savings increasingly shift from traditional bank deposits to higher-yield equity instruments like mutual funds or direct stock investments, concerns about a potential liquidity crunch in the banking system grow.The RBI data says, bank loans growing 13.7% year-on-year as of July 26 this year, while deposits lagged at 10.6%. RBI Governor Shaktikanta Das reportedly acknowledged the growing appeal of equities among younger Indians but questioned whether this shift is the root cause of deposit growth stagnation. The underlying problem may not be equities themselves, but rather the broader financial environment that drives savers towards higher returns, challenging traditional banking models.

According to information,the Indian banking system consists of 12 public sector banks, 22 private sector banks, 44 foreign banks, 56 regional rural banks, 1,485 urban cooperative banks, and 96,000 rural cooperative banks in addition to cooperative credit institutions. India has come down from 27 public sector banks in 2017 to 12 in 2020.Presently, the country is having more than 2.5 lakh bank branches.And they collect average deposit 0f Rs 1,0000 per day.

The government has stressed the need for concerted measures concerning the widening gap between deposits and credit growth. Finance Minister Nirmala Sitharaman, recently,during a high-level meeting with top executives of PSBs, urged PSBs to intensify their efforts to bolster deposit growth, improve customer service, and strengthen rural outreach.PSBs were reportedly directed to expedite the implementation of government schemes like the PM Surya Ghar Muft Bijli Yojana and PM Vishwakarma Yojana, ensuring increased credit flow to eligible beneficiaries. Sitharaman also commended the improvements in asset quality and urged PSBs to optimize recovery processes through platforms like the NCLT and NARCL.

Federal Bank Reports Balanced Growth.Amidst these challenges, Federal Bank has reported a notable achievement.The bank recorded a balanced increase in both deposits and credit, each growing by 20% annually, according to information. This performance underscores Federal Bank’s successful strategy in navigating the current market conditions. However, potential new regulations from the RBI could impact lending practices and further influence the deposit landscape. As the RBI considers implementing new rules, banks must remain agile and adapt to ensure continued growth and stability,believe experts.

While the finance minister has proposed multiple strategies to enhance deposit growth, the absence of a comprehensive plan to expand banking in the untapped rural areas of Bharat remains a critical concern. For PSBs to stay relevant and compete effectively, embracing customer-centric services and advanced technology is essential to ensure they remain resilient in an increasingly competitive environment.