Recent data from a research report by Union Bank of India reveals a significant drop in liquidity within the Indian banking system. As of August 28, 2024, banking liquidity has plummeted to ₹0.95 lakh crore, a substantial decrease from its peak of ₹2.86 lakh crore earlier this month.
A Month of Declining Liquidity
The decline in liquidity has been steady throughout August. On August 2, 2024, the liquidity stood at ₹2.56 lakh crore. By August 16, it had already fallen to ₹1.55 lakh crore, and it further dropped to ₹0.95 lakh crore by the end of the month.
The Union Bank of India’s report notes, “As of August 28, the system liquidity was in surplus, to the tune of ₹0.95 lakh crore, easing from the peak of ₹2.86 lakh crore earlier this month.”
Concerns and Government Responses
This downward trend in liquidity is a cause for concern as it may have wider implications for the economy. Despite repeated appeals from Finance Minister Nirmala Sitharaman and RBI Governor Shaktikanta Das for banks to take steps to enhance liquidity, the situation has continued to worsen.
During a review meeting with Public Sector Banks (PSBs) earlier this month, Sitharaman emphasized the need for better deposit mobilization. She pointed out that although credit growth is on the rise, banks need to improve their efforts in gathering deposits to support this growth sustainably. Sitharaman urged banks to conduct special drives to increase deposits and improve customer service, particularly in rural and semi-urban areas.
She also stressed the importance of focusing on core banking activities—deposits and lending. “The Reserve Bank and the Government are repeatedly telling the banks to pay attention to their core business activities,” she said. “Collect deposits and lend with more strictness as this is the core business of banking.”
Shifting Consumer Behavior
RBI Governor Shaktikanta Das highlighted a shift in consumer behavior, noting that households are increasingly turning to capital markets and other financial intermediaries instead of relying solely on banks for their savings. He remarked, “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.”
While bank deposits still make up a significant portion of household financial assets, their share is declining. More people are allocating their savings to mutual funds, insurance funds, and pension funds.
Looking Ahead
The decline in liquidity and changing consumer preferences highlight the need for banks to adapt to evolving market conditions. As the financial landscape shifts, it will be crucial for banks to innovate and improve their deposit mobilization strategies to ensure they can continue to support economic growth effectively.
PSBs must relook their interest rates on SB and Term Deposits to make them more attractive to public along with improving service with human touch