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Informist, Thursday, Sep 5, 2024

 

MUMBAI – It has been suggested to the Indian government that it should keep its huge cash balances with commercial banks in the form of short-term deposits, a move that could ease systemic liquidity issues and also give the government interest revenue.

 

Speaking at the FIBAC 2024 banking conference here today, Nilesh Shah, group president and managing director of Kotak Mahindra Asset Management Co Ltd, said he had made the suggestion to the government's Chief Economic Adviser V. Anantha Nageswaran. Shah himself is a part-time member of the Prime Minister's Economic Advisory Council.

 

"I proposed very recently to CEA (Nageswaran) that why does not the government deploy these (cash) balances with banks as short-term deposits," Shah said. "On 2 lakh crore (2 trln rupees), they (banks) will easily offer 6% (interest). That's 12,000 crore (120 bln rupees) income to the government of India. Banks will be happy because they will have surplus liquidity. There will be no such wide variation. So government benefits, banks benefit, economy benefits."

 

Slowing deposit growth seems to have become a challenge for India's banks, with bankers at the FIBAC conference saying gathering deposits is no longer a 'walk-in' approach and requires actual outreach. They also noted that the government's high cash balances and investments in small savings schemes, among others, explained the weak deposit growth.

 

In his statement detailing the monetary policy decision in early August, Reserve Bank of India Governor Shaktikanta Das noted that the emergence of alternative investment avenues were attracting retail customers, leading to an erosion of banks' deposit growth. Banks in turn were forced to look at short-term, non-retail deposits and other instruments to meet demand for loans. This, according to the governor, could lead to structural liquidity issues for banks.

 

"Banks may, therefore, focus more on mobilisation of household financial savings through innovative products and service offerings and by leveraging fully their vast branch network," the central bank chief said Aug 8.

 

As per the latest data from the RBI, banks' deposits were up 10.9% year-on-year as of Aug 9, while loan growth was up 13.6%.

 

Some economists, however, are not convinced that deposit growth is becoming a constraint for banks' lending activity. The debate on 'missing deposits', according to the research team at Union Bank of India, is "missing the wood for the trees as the bigger focus needs to be on the excessively high credit growth which the RBI wants to ease to align with the 'withdrawal of accommodation' policy."

 

The RBI's Monetary Policy Committee has left the repo rate unchanged at 6.5% for nine meetings in a row as it battles to bring headline retail inflation down to the 4% medium-term target on a sustained basis. The latest inflation print for July, at 3.54%, was the first sub-4% print since September 2019, dragged down by a favourable base effect. However, inflation is expected to rise again in the coming months, with the RBI forecasting it to average 4.7% in Oct-Dec, up from 4.4% in Jul-Sep.  End

 

Reported by Siddharth Upasani and Sourabh Kumar

Edited by Rajeev Pai

 

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