Liquidity in the Indian banking system has seen a significant decline this month says a research report by the Union Bank of India. It says the banking liquidity has fallen to Rs 0.95 lakh crore as on 28th August from a peak of Rs 2.86 lakh crore.
The report highlights that the decline in liquidity continued throughout this month. At the beginning of the month, on August 2, 2024 banking liquidity was at Rs 2.56 lakh crore which has reduced to Rs 1.55 lakh crore on August 16th and now at Rs 0.95 lakh crore on August 28.
The report stated, “As of 28th Aug, the system liquidity was in surplus, to the tune of Rs.0.95 lakh crore, easing from the peak of Rs.2.86 lakh crore earlier this month.”
This downward trend in banking liquidity comes despite repeated appeals by the Finance Minister and the RBI Governor to banks to take measures to boost liquidity in the system.
The continuous reduction in liquidity raises concerns, it could have broader implications for economic activities
Union Minister for Finance, Nirmala Sitharaman during her review meeting with the Public Sector Banks (PSBs) this month deliberated on deposit mobilisation issue, the Union Finance Minister stated that while the credit growth has picked up, the mobilisation of deposits could further be improved to fund the credit growth sustainably and asked banks to make concerted efforts to garner deposits by conducting special drives.
Sitharaman also advised PSBs to have better relationships with their customers for efficient customer service delivery. She also urged Banks to reach out and connect with their customers, especially in rural and semi-urban areas.
On August 10, Sitharaman asked the banks to focus on their core business of deposits and lending and come up with innovative products to increase deposits.
Sitharaman also urged the PSBs to explore collaboration to leverage their respective strengths by sharing best practices in emerging areas and equip themselves to keep pace with changes in the banking sector.
She said “The Reserve Bank and the Government are repeatedly telling the banks to pay attention to their core business activities. It is not that they are not paying attention, but collect deposits and lend with more strictness as this is the core business of banking. Later you can add some new activity if there is a mismatch between deposits and lending, and the wheel of deposit is being slowed down and lending is increasing fast.”
RBI Governor Shaktikant Das also highlighted that traditionally, banks were the primary choice for households to invest their money. However, there has been a noticeable change in consumer behaviour, with a growing preference for capital markets and other financial intermediaries.
He noted, “Households and consumers who traditionally leaned on banks for parking or investing their savings are increasingly turning to the capital markets and other financial intermediaries.” This trend indicates a broader diversification of household investments into mutual funds and other savings tools, moving away from traditional investment tools.
The Governor stated, “While bank deposits continue to remain dominant as a percentage of the financial assets owned by the households, their share has been declining, with households increasingly allocating their savings to Mutual Funds, Insurance Funds, and Pension Funds.”
