Sun Sep 15 15:29:00 UTC 2024: ## Banks Scramble to Attract Deposits as Credit Growth Outpaces Funding

**Mumbai, India** – The Reserve Bank of India (RBI) has expressed concern over the widening gap between credit growth and deposit growth, warning of potential liquidity issues if the trend continues. According to recent data, credit growth has surged 14% year-on-year (YoY) to ₹169.5 lakh crore, while deposit growth has lagged behind at 11% to ₹213.2 lakh crore. This disparity has been persistent since March 2022, prompting the regulator to take notice.

While some bankers attribute the slowing deposit growth to a shift in household savings towards the equity market, others argue that this capital will eventually find its way back into the banking system through various channels. Regardless, banks are actively seeking ways to attract depositors back.

**Digital Banking Takes Center Stage**

Bank of Baroda (BoB) MD and CEO Debadatta Chand emphasizes the growing preference for digital banking over traditional branch banking. He highlights the success of BoB’s digital platforms in attracting new deposits, with nearly 16% of new fixed deposits and 35% of new recurring deposits originating from digital channels. BoB has also rebranded its recurring deposit product as a “systematic deposit plan” (SDP), mirroring popular systematic investment plans (SIPs) offered by mutual funds.

**Customized Strategies for Customer Retention**

RBL Bank, too, has adopted a multi-pronged approach to bridge the gap between credit and deposit growth. They are focusing on high-value customers, offering personalized services through dedicated relationship managers. The bank is also expanding its presence in existing neighborhoods and utilizing micro-marketing events to attract local deposits. RBL Bank is also leveraging its strong digital banking platform, with 70-75% of customers transacting digitally.

**Deposit-Led Growth Strategy at Bandhan Bank**

Bandhan Bank has adopted a deposit-led credit growth strategy, with deposits rising 23% YoY to ₹1.33 lakh crore in Q1FY25. This was accompanied by a 22% YoY growth in advances to ₹1.25 lakh crore. The bank is introducing new low-cost current account products and expanding its cash management services to attract deposits.

**Government and Regulatory Intervention Needed**

Central Bank of India MD and CEO MV Rao argues that the active participation of regulators and the government is crucial to address the deposit shortfall. He points out that returns from mutual funds often exceed those of bank deposits, as the deployment of bank resources is heavily regulated. He emphasizes the need for banks to offer higher returns to depositors, which may necessitate government and regulatory intervention. Rao also raises concerns about the potential systemic risks associated with mutual fund investments, highlighting the relative safety of bank deposits in the long run.

**Conclusion**

The widening gap between credit and deposit growth poses a significant challenge for the banking sector. Banks are implementing various strategies to attract deposits, including digital banking initiatives, personalized customer services, and expanded product offerings. However, the issue requires a collaborative effort between banks, regulators, and the government to address the underlying factors contributing to the shift in savings preferences and ensure the continued stability of the financial system.

Read More