RBI Warns Banks of Liquidity Issues Due to Deposit Growth Lag

Mumbai, Jul 19 (PTI) Reserve Bank of India (RBI) Governor Shaktikanta Das on Friday warned banks of "structural liquidity issues", if deposit growth continues to trail credit growth.

Das also flagged more issues on the unsecured credit front, pointing out that banks are having higher ceilings for such risky credit despite the portfolios being large enough, and asked them to be prudent and avoid exuberance.

Urging banks to maintain a "reasonable balance" between credit and deposit growth, Das also mentioned that a good part of household savings that used to come into the banking system as deposits is now going into other instruments like mutual funds.

"Credit growth should not run ahead of deposit growth by miles. More so when banks are required to maintain CRR, SLR, LCR," Das said during his address at a summit organised by Financial Express here.

"Deposit mobilisation has been lagging credit growth for some time now. This may potentially expose the system to structural liquidity issues," he added.

He said the regulatory concerns stem from the fact that there could be structural changes happening which banks and NBFCs and other lenders need to recognise, and accordingly devise their strategies.

The governor said households are increasingly turning to other avenues for deploying their savings instead of banks, and added that this has forced the banks to go looking for other avenues for liabilities like certificate of deposits.

Das also asked banks to correctly value the liquid assets, pointing out that any incorrectness can give a "false sense" of short-term liquidity resiliency which is not desirable.

On the digital frauds front, he said the RBI is working with banks and law enforcement agencies to check mule accounts, and urged the banks to strengthen their customer onboarding and transaction monitoring systems to monitor unscrupulous activities, including suspicious and unusual transactions.

Banks and NBFCs also need to consider whether cost optimisation strategies are leading to over-dependence on third party vendors, even for critical functions without commensurate oversight, he said.

The November 2023 action on the unsecured credit has led to a certain degree of moderation in the targeted segments, he said.

"It needs to be emphasised that the delinquency levels and leverage in small ticket consumer loans warrant enhanced vigil," he said.

Das said the system is stable and healthy at an overall level, and added that nobody should assume otherwise, given such comments and the regulatory actions against particular outlier entities.

India stands out as a fast growing major economy, with stronger macroeconomic fundamentals and healthy and resilient financial sector, the governor said, adding that the financial sector is poised to scale new heights given the strong macroeconomic configuration, favourable demographics and significant pace of digitalisation.

The financial landscape in India is undergoing a structural transformation and this transformation is primarily driven by factors like innovations in technology, financial deepening, and changing savings and investment patterns, he said.

There has been a transformation in the banking and financial landscape in the last decade, which is driven by technological innovations changing consumer preferences, and emergence of alternative business models, he added.