In a recent address, Reserve Bank of India (RBI) Governor Shaktikanta Das highlighted several pressing issues related to the declining household savings and its implications for the banking sector. The Governor’s remarks come as a call to action for banks to rethink their strategies for mobilizing deposits and managing credit risks.
Concerns Over Deposit Growth
Governor Das expressed deep concern over the shifting trends in household savings, noting a significant decline in traditional deposit growth. He attributed this shift to the rising attractiveness of alternative investment avenues, which are increasingly drawing retail customers away from traditional savings accounts and fixed deposits. This shift poses a challenge for banks that are struggling to maintain deposit growth in line with rising credit demand.
Das emphasized the need for banks to innovate their product offerings and leverage their extensive branch networks to attract and retain household savings. He urged banks to develop new, appealing deposit products and services that align with the evolving preferences of customers, thus ensuring a stable deposit base to support their credit portfolios.
Risks from Short-Term Non-Retail Deposits
The Governor highlighted that banks are increasingly relying on short-term non-retail deposits and other liability instruments to meet growing credit demands. This reliance on non-retail deposits poses potential risks to the stability of the banking system, as it could lead to structural liquidity issues. Das called for a more balanced approach, where banks should strive to enhance their retail deposit base rather than over-relying on short-term sources of funds.
Issues with ‘Top-Up’ Housing Loans
Das also addressed the issue of ‘top-up’ housing loans, where additional funds are provided on existing mortgage loans. He pointed out that some financial entities are not adhering strictly to regulatory guidelines regarding loan-to-value (LTV) ratios, risk weights, and fund utilization monitoring. This lack of adherence could lead to funds being used unproductively or for speculative purposes, which in turn could jeopardize the financial stability of both borrowers and lenders.
He urged banks and non-banking financial companies (NBFCs) to review their practices related to top-up loans and ensure compliance with regulatory standards. Ensuring that funds are used appropriately and within the prescribed guidelines is crucial to prevent misuse and protect the integrity of the financial system.
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Monitoring Rising Personal Loan Segments
In addition, Governor Das raised concerns about the rapid growth in the personal loan segment. Despite pre-emptive regulatory measures introduced in November last year to moderate credit growth in certain sectors, some segments of personal loans continue to experience high growth rates. Das advised banks to exercise caution and implement rigorous monitoring of credit growth in personal loans. He stressed the importance of careful assessment, calibration of underwriting standards, and post-sanction monitoring to prevent excessive leverage and ensure responsible lending practices.
Importance of Robust IT and Cybersecurity Measures
Governor Das also touched upon the growing importance of robust business continuity plans (BCP) for banks and financial institutions. Recent global IT outages have underscored the need for effective risk management frameworks in IT, cybersecurity, and third-party outsourcing. Das stressed that banks must enhance their risk management practices to ensure operational resilience and mitigate the impact of potential disruptions.
Proposing Increased Frequency of Credit Reporting
In his address, Das proposed increasing the frequency of reporting to credit information companies (CICs). Currently, lenders report borrower information on a monthly basis or as per intervals agreed with credit bureaus. Das suggested moving to a fortnightly or shorter reporting cycle. This change would enable quicker updates to borrowers’ credit information, benefiting both lenders and borrowers by providing more current and accurate credit profiles.
Governor Shaktikanta Das’s address reflects a proactive approach towards addressing the challenges facing the Indian banking sector amidst changing household savings patterns and rising credit risks. By urging banks to innovate their deposit products, adhere to regulatory standards, and enhance their risk management practices, Das aims to foster a more resilient and stable financial system. His recommendations on reporting frequency and monitoring practices highlight the RBI’s commitment to maintaining financial stability and protecting the interests of both depositors and borrowers.
