Hello everyone,  

Welcome to the 121st edition of The Pattern, a weekly newsletter where we delve into the latest from the world of economy, finance, and technology. Let’s get started.  

The deposit rush   

The Indian banking system has an attractiveness problem. In the gold rush of the stock markets and mutual funds, savers seem to be forgetting the old and trusted savings accounts. This is critical because banks don’t seem to have enough cash left to continuously fund zooming credit growth at a time when deposits are dwindling. They do borrow from the market to loan again, but these funds are relatively more expensive than the 3%-4% that the banks generally pay to savings account holders.  

It’s not all gloom and doom, though. Recent data shows that deposit growth outstripped credit growth, this came on the back of slowing credit growth as banks are rushing to manage the mismatch between deposit and credit growth.  

"I know that the most important part of our strategy is deposits, and are we happy with the kind of numbers that have come about? Not really,” HDFC Bank Managing Director Sashidhar Jagdishan said recently.  

This isn’t the first time we’re talking about this, and it probably won’t be the last. The truth is that everyone from the government to the RBI to the bankers on the frontlines are at their wit’s end trying to drum up deposits. This could pose a long-term liquidity problem in the system if credit growth continues to outstrip deposits. This is a concern that even the RBI is not mincing words about. Here’s what RBI Governor Shaktikanta Das said in a recent monetary policy statement:  

“First, it is observed that alternative investment avenues are becoming more attractive to retail customers and banks are facing challenges on the funding front with bank deposits trailing loan growth. As a result, banks are taking greater recourse to short-term non-retail deposits and other instruments of liability to meet the incremental credit demand. This, as I emphasised elsewhere, may potentially expose the banking system to structural liquidity issues. Banks may, therefore, focus more on mobilisation of household financial savings through innovative products and service offerings and by leveraging fully on their vast branch network.”  

Everyone agrees that banks must find innovative ways to bump up deposits over the short run. But how will they manage that? Nobody’s got a clue.  

Reforms abound  

Even as banks grapple with the mounting challenges of deposit-undertaking, the RBI is ensuring that the rest of the financial services marches ahead full steam.  

First up, we have a reform in the UPI ecosystem as the RBI bumped up the limit per transaction from Rs 1 lakh to Rs 5 lakh. This is a massive shift which will further boost UPI’s popularity as the preferred mode of payment for even large value transactions such as school fees, hospital bills and other such places where cash and cheque were dominant so far.  

On the subject of cheques, the RBI is also innovating with the clearing house system in India by targeting clearance of cheques within hours of depositing at the bank, thus resulting in faster payments and better consumer experience.  

“Cheques will be scanned, presented, and passed in a few hours and on a continuous basis during business hours. The clearing cycle will reduce from the present T+1 days to a few hours,” the RBI said in a notification.  

The RBI has also suggested improving the reporting of credit information to credit bureaus by financial services institutions from monthly to fortnightly, going forward. The central bank posits that more frequent information updates will help improve the underwriting and risk controls at the banks as well as help borrowers keep their credit scores up to date with more regular updates.  

Whether the credit bureaus and lenders find a sustainable, long-term solution of doing this without relying on clunky excel sheets is anybody’s guess.  

That’s all for this week. As always, leaving some reading recommendations below.  

Reading List  

1. Indian banks need to quell a looming threat as savers flock to stocks  

2. MFIs seek easier credit rating rules as they gasp for bank loans  

3. PSU banks' compensation against fraud rises over three-fold to Rs 140 crore in FY'24  

4. Bankers remain upbeat on loan demand: RBI survey  

5. State Bank of India forms a team of 2,000 bankers to attract the rich clients  

Thank you for reading. If you liked this edition, forward it to your friends, peers, and colleagues. You can also connect with me on Twitter here and follow FinBox on LinkedIn to always get all updates.

Cheers,

Mayank

All opinions expressed are my own and do not necessarily reflect the views of FinBox or its promoters.