Indian Banks Aim to Secure Deposits: Balancing Technology and Liquidity
In the digital age, Indian banks have embraced technological advancements, enabling billions of transactions through smartphones. This transformation, while impressive, has caught the eye of regulators who are now taking measures to ensure financial stability. The Reserve Bank of India (RBI) is urging banks to hold more liquid assets to meet potential outflows, factoring in depositors’ behavior and vulnerabilities.
Increasing Liquidity Requirements
The RBI has announced that starting from April 1, banks will have to ramp up their liquidity buffers. Banks need to reassess the likelihood of deposit withdrawals and consequently hold more cash and government securities. The current assumption is that 5% of stable retail deposits might be withdrawn over a 30-day period—this figure will now be increased to 10%, considering the unpredictability of deposits, especially those linked to mobile and internet banking.
This change comes as a protective measure inspired by incidents like the failure of Silicon Valley Bank (SVB) in the United States, where digital withdrawals occurred at lightning speed, leading to a massive $42 billion run-off in a single day.
The Impact on Banks
By forcing banks to hold more low-risk, low-return assets, the RBI aims to reduce the flightiness of deposits and prevent a rapid depletion of funds that could mimic the SVB scenario. However, there are trade-offs. Holding more liquid assets might mean fewer funds are available for lending, potentially leading to slower credit growth. CRISIL, an S&P Global Inc. affiliate, has projected a moderation in credit growth due to this liquidity tightening.
Moreover, this increased reserve requirement could pressure banks’ profitability. With higher costs of deposits and increasing bad loans, banks face a challenging environment. The tightening measures could reduce their net interest margins, forcing them to be even more cautious in their operations.
Deposit Behavior and Technological Vulnerabilities
The RBI’s new regulations are particularly concerned with deposits linked to mobile and internet banking due to their higher likelihood of quick withdrawal. Presently, a significant portion of India’s 820 million internet users is involved in digital banking, which includes QR code payments and transferring money through mobile numbers.
A key demographic shift is also in play. Younger, tech-savvy Indians are more inclined to use digital banking, while older generations, and even gender-based preferences, sway towards traditional banking methods. For instance, women are more likely to opt for cash-on-delivery than online payments, providing banks with more stable deposits.
Krishna Hegde, a Bengaluru-based financial technology professional, highlights this by saying, “My mother’s 10,000-rupee deposit is more valuable for the bank than my 10,000-rupee deposit,” emphasizing the stability brought by less tech-reliant customers.
Future Challenges: Brokered Deposits
While addressing digital banking-related risks, the RBI might be overlooking another possibly bigger issue: brokered deposits. These are funds managed by intermediaries, influenced by factors beyond the banks’ direct control. Large corporations like Alphabet Inc. have begun utilizing local-payment apps to redirect deposits, which can lead to less stable, less predictable fund sources for banks.
Hegde points out that “funds sourced by a third party are likely to be less durable,” hinting at potential future vulnerabilities. Dealing with these brokered deposits might pose an even greater challenge for banks than the current digital banking concerns.
Ways Banks Can Adapt
To navigate the challenges posed by the new RBI norms while maintaining growth and profitability, Indian banks may need to adopt several strategies:
- Strengthen Customer Relationships: Banks should nurture relationships with their less tech-savvy customers, who tend to have stickier deposits. Personalized service at branches and ATMs could go a long way in securing these valuable deposits.
- Diversify Funding Sources: They might need to look beyond traditional deposits and explore avenues like long-term bonds and international borrowing to supplement their liquidity stores.
- Enhance Risk Management: By improving their liquidity management practices, banks can be better prepared to handle unexpected large-scale withdrawals.
- Innovate Products and Services: Providing tailored financial products that meet the needs of both tech-savvy and traditional customers can ensure a balanced portfolio. This includes flexible savings plans, attractive interest rates for long-term deposits, and more.
- Leverage Digital Initiatives Cautiously: While embracing digital transformation, banks should implement mechanisms to monitor and control the rapid outflow of funds, ensuring they remain within safe thresholds.
Conclusion: Balancing Act for Stability
In conclusion, the RBI’s new guidelines present a balancing act for Indian banks. While technology has brought numerous benefits and convenience, the increased potential for rapid withdrawals necessitates heightened precautions. Banks must hold significantly more liquid assets, adjust their operations, and be ready to manage behavioral vulnerabilities among depositors.
Ultimately, the key will be blending technological progress with robust risk management to ensure a stable, resilient banking system that can weather any financial storm. It’s a dual approach of embracing the future while holding firm to the security of traditional methods, ensuring the safety and trust of all depositors.
Mehek 
Deepika