Finance Minister Nirmala Sitharaman’s recent directive to the chiefs of public sector banks (PSBs) to accelerate the growth rate of their deposits underscores a critical concern in India’s banking sector.
As the pace of credit growth outstrips deposit growth, the banking system faces the looming threat of an asset-liability mismatch—a situation that could destabilize the sector and impede broader economic progress.
Over the past several months, the Indian economy has witnessed a robust resurgence in credit demand, driven by factors such as increased consumer spending, a rebound in business activities, and a renewed push for infrastructure development.
Banks typically use short-term deposits to fund long-term loans. If deposit growth fails to keep pace with credit expansion, banks might find themselves in a precarious position where they have more liabilities (credit extended) than assets (deposits). This mismatch can lead to liquidity crises, forcing banks to either liquidate assets at unfavorable prices or borrow at high-interest rates to meet their obligations.
Finance Minister Sitharaman’s directive to accelerate deposit growth is both timely and necessary. Public sector banks, which hold a significant share of the country’s deposits and loans, must take proactive measures to bridge the deposit-credit gap. This could involve a combination of strategies, including offering more attractive interest rates on deposits, launching targeted deposit schemes, and enhancing customer outreach to mobilize funds from untapped segments of the population.
Moreover, banks must focus on digital innovation and financial inclusion to widen their deposit base. The advent of digital banking presents an opportunity to reach customers in rural and semi-urban areas who may not have access to traditional banking services. By leveraging technology and promoting financial literacy, banks can attract new depositors and foster a culture of savings across diverse demographics.
