PSBs facing deposit challenges amidst untapped options in villages

Indian banks are facing a significant challenge in growing their deposit bases as customers increasingly explore a range of alternative investment options. The trend is reshaping the financial landscape. As per RBI Bulletin the share of bank deposits is diminishing as households redirect their savings into alternative investment avenues such as mutual funds. insurance, and pension funds. This shift is impacting the banking sector, with deposits failing to keep pace with rising loan growth. As a result, many banks are increasingly relying on short-term non-retail deposits and other liability instruments to meet the burgeoning credit demand.The RBI has consistently highlighted the need for banks to focus on deposit mobilization, cautioning that a sustained imbalance could lead to liquidity stress and impact the cost of funds.
Only PSBs are facing challenge
PSBs has shown strong performance in FY24, a decline in Net NPAs to 0.76%, a capital adequacy ratio of 15.55%, and a record net profit of Rs1.45 lakh crore, the government-owned banks are still facing challenges regarding their deposit base to sustain rising credit demands and ensure the stability of the financial system.
as per sources only government public sector banks are facing this challenge. It is because PSBs are not opening their new branches in rural Bharat whereas private banks are giving more thrust in rural area and they are getting more deposit. Sources said that the financial scenario of India has changed Villagers. Because of bank facilities near to their house they are opting it happily and depositing their amount in banks. "They still believe in traditional banking whereas urban youth opting quick return mode and that is the reason they are going after Mutual Funds,: they said. The notion that equities and mutual funds are eroding bank deposits has gained traction, but the reality is more nuanced. As household savings increasingly shift from traditional bank deposits to higher-yield equity instruments like mutual funds or direct stock investments, concerns about a potential liquidity crunch in the banking system grow.The RBI data says, bank loans growing 13.7% year-on-year as of July 26 this year, while deposits lagged at 10.6%. RBI Governor Shaktikanta Das acknowledged the growing appeal of equities among younger Indians but questioned whether this shift is the root cause of deposit growth stagnation. The underlying problem may not be equities themselves, but rather the broader financial environment that drives savers towards higher returns, challenging traditional banking models.

The Indian banking system consists of 12 public sector banks, 22 private sector banks, 44 foreign banks, 56 regional rural banks, 1,485 urban cooperative banks, and 96,000 rural cooperative banks in addition to cooperative credit institutions. India has come down from 27 public sector banks in 2017 to 12 in 2020.Presently, the country is having more than 2.5 lakh bank branches.And they collect average deposit 0f Rs 1,0000 per day.  
The government is also concerns about the widening gap between deposits and credit growth. Finance Minister Nirmala Sitharaman, during a high-level meeting with top executives of PSBs, asked PSBs to intensify their efforts to bolster deposit growth, improve customer service, and strengthen rural outreach.PSBs were reportedly directed to expedite the implementation of government schemes like the PM Surya Ghar Muft Bijli Yojana and PM Vishwakarma Yojana, ensuring increased credit flow to eligible beneficiaries. Sitharaman also commended the improvements in asset quality and urged PSBs to optimize recovery processes through platforms like the NCLT and NARCL.
Federal Bank reports balanced growth
Amidst these challenges, Federal Bank has reported a notable achievement. The bank recorded a balanced increase in both deposits and credit, each growing by 20% annually, according to information. This performance underscores Federal Bank's successful strategy in navigating the current market conditions. However, potential new regulations from the RBI could impact lending practices and further influence the deposit landscape. As the RBI considers implementing new rules, banks must remain agile and adapt to ensure continued growth and stability, believe experts.
Though, the finance minister listed out several steps to boos the deposit, but,as per sources, why the government is not coming out with a detailed plan of banks expansion in rural Bharat,which is still untapped?. PSBs should also adopt customers' friendly approach and user friendly technology to keep themselves alive in cut throat market.
Meanwhile, public sector banks have appeal to the finance ministry urging that government cash balances be held by them, rather than the Reserve Bank of India (RBI). This move, they argue, would bolster the share of low-cost current account and savings account (Casa) deposits which has been dwindling.In 2021, the government implemented a new framework under the SNA-SPARSH platform, aimed at improving the flow and monitoring of funds under centrally sponsored schemes (CSS). Under this system, government cash balances were directed to the RBI rather than to commercial banks. Bankers argue that this change has resulted in reduced float funds and thus has impacted operational efficiencies. This has raised the cost of deposits and negatively impacted banks’ net interest margins.

(Writer is a Finance Research Analyst, based in Gandhinagar, Gujarat)