Banks need to concentrate on strengthening resource base and its mobilisation

The current rate of deposit growth will not be sufficient if one takes stock of the incremental credit requirements as the festival season will add to the demand for working capital

There were times when credit growth was not happening and banks were asked to provide the momentum to the Indian economy by extending need-based credit to productive sectors. Incidentally, the bank credit to gross domestic product (GDP) ratio as on August 21 is relatively low compared to other countries and certainly the lowest amongst its peer group. For India to emerge as the third largest economy it is imperative that bank credit to GDP ratio must be stepped up substantially to meet the requirement for large physical infrastructure projects that are in the pipeline. Apart from expanding trade and commerce, the volume and value of exports will also have to grow substantially. The current financial strength of banks in terms of profitability, capital adequacy, low-level of NPAs with much higher provisions coverage should enable them to expand and grow in line with the changing times.

Therefore the current level of 14 per cent growth in bank credit is a reasonable level of credit growth. It has been the average percentage from March 2000 to April 2024 with the maximum of 27.1 per cent recorded in July 2009 and a low of 5.4 per cent in May 2021.

During the Covid-19 lockdown, there was not much demand for credit and for apparent reasons. Subsequently, there was an impressive revival, thanks to policy support from the Union Government and the Reserve Bank of India (RBI). In order to sustain credit growth buoyancy, it is essential that the credit growth should be sound as regards credit risk management. The focus should be on higher credit growth with need-based productive use of resources.

It is in this background that we have to look at how banks are currently doing in terms of deposit growth, which is a prerequisite for appropriate diversion of credit to productive sectors. There have been concerns of late that the deposit growth of scheduled commercial banks was lagging behind credit growth. Both the regulator and the government have been expressing their concern on this issue.

The role of banks in attracting people towards savings and term deposits has become a crucial factor.

The current rate of deposit growth will not be sufficient if one takes stock of the incremental credit requirements as the festival season will add to the demand for working capital. Moreover, the private sector has started looking at capacity expansion as there are signs of rural demand picking up as the capacity utilisation in some sectors has improved in recent times. The central and state government will start implementing large infrastructure projects, which will enhance the credit requirements.

The share of bank deposits in gross financial savings of households has fallen to 29.4 per cent from the long-term average of 33 per cent%.

We have seen substantial addition to demat accounts and as on June 2024, there were 16.2 crore demat accounts in India. The mutual fund industry has attracted substantial savings towards innovative investment schemes. The current outstanding size has reached a high of Rs. 64.97 trillion as on July 31, 2024, which is a more than six-fold increase in 10 years.

On their part, banks have increased deposit rates to woo people, particularly for long term deposits. As the credit deposit ratio of the banks is hovering around 80 per cent, banks are also offering attractive rates for bulk deposits depending on their ALM mismatches. The growth in core savings and current deposits and core term deposits are stable source of resources for the banks.

There were concerns that the percentage of demand deposits, which are low-cost funds, is on the decline. Meanwhile, physical assets like gold and real estate have attracted considerable investment in the recent past in view of the likely upward valuation, this is notwithstanding the fact that gold and real estate are also subject to much volatility in valuation.

Banks have been pleading for more tax concession to bank depositors to make up for better risk adjusted return and tax adjusted real return. As banks play a greater role in nation-building and economic growth, strengthening their hands in getting a better edge to attract savings, their request needs better consideration. However, given the current thinking of removing all tax concessions and going in for a new simple taxation regime, it is little uncertain these requests will be considered.

It is therefore necessary for banks to step up their deposit mobilisation efforts and regain higher market share. Banks are most suited to get depositors’ support as they have exhibited a customer-friendly approach. With trust, confidence and safety as the parameters, people have always preferred banks as the first choice when it comes to placing their resources.

Recently there was a request to increase insurance cover for retail deposits, which is at Rs. five lakh. This certainly needs be enhanced as a customer feels more safe with a higher cover. Even though the regulators have been ensuring that banks do not fail, they are taking immediate corrective steps in extreme cases.

Most senior citizens have placed their retirement benefits and surpluses in banks due to which banks have to considerate in giving them a much higher return as they depend on the interest amount for their daily requirements. The need to enhance insurance cover is pronounced as no one can afford losing their hard earned savings.

We trust that the current sluggish growth in deposits is only temporary phase and along with the per capita income growth, savings will also grow so that inflation can be controlled. With renewed efforts and efficient strategies banks can boost their resources base substantially.

(The author is former Chairman & Managing Director of Indian Overseas Bank)