Nirmala Sitharaman wants public banks to go all out on deposits in her performance review

Finance Minister Nirmala Sitharaman has directed public sector banks to intensify their efforts in mobilizing deposits, following concerns that deposit growth has been lagging behind credit growth by 3% to 4% in recent months. While acknowledging the progress banks have made in improving asset quality, with net non-performing assets dropping to 0.76% in 2023-24, Sitharaman emphasized the need for a more robust approach to deposit mobilization to ensure sustainable credit growth.

During a recent performance review of public sector banks, Sitharaman reiterated the importance of enhancing deposit mobilization. She urged banks to conduct special drives and reach out to customers, particularly in rural and semi-urban areas, to gather more deposits. The Minister also advised banks to return to the traditional approach of raising small amounts from a broad base of savers rather than relying heavily on bulk corporate deposits.

The government, alongside the Reserve Bank of India (RBI), has been pushing banks to address the imbalance between deposit and credit growth. This issue was also discussed at the RBI’s central board meeting on August 10, where Sitharaman underscored the importance of securing small deposits to strengthen the banking system.

In response to the lag in deposit growth, banks have been increasingly turning to alternative funding sources such as commercial paper and certificates of deposit. According to the RBI’s August Bulletin, certificates of deposit issuances amounted to Rs 3.49 lakh crore during 2024-25 (up to August 9), a significant increase from Rs 1.89 lakh crore in the same period the previous year. Commercial paper issuances also rose to Rs 4.86 lakh crore during 2024-25 (up to July 31), driven by higher borrowings from non-banking financial companies (NBFCs).

RBI Governor Shaktikanta Das expressed concern over the trend of household savings shifting towards alternative investment avenues, urging banks to leverage their extensive branch networks to offer innovative products and services to attract deposits. "Banks are taking greater recourse to short-term non-retail deposits and other instruments of liability to meet the incremental credit demand. This, as I emphasised elsewhere, may potentially expose the banking system to structural liquidity issues," Das warned.

In addition to focusing on deposit mobilization, Sitharaman also called for public sector banks to enhance their customer service, particularly by fostering stronger relationships with customers in rural and semi-urban areas. She stressed the importance of efficient service delivery and urged banks to ensure that their employees actively engage with customers.

The RBI bulletin also noted that domestic bond yields had eased, reflecting positive sentiment following the inclusion of Indian government securities in the global bond index and other favorable fiscal indicators. System liquidity remained in surplus during July and August, supported by increased government spending, the return of currency to the banking system, and the RBI’s forex operations. The average daily net absorption under the liquidity adjustment facility (LAF) rose to Rs 1.52 lakh crore between July 16 and August 15, 2024.