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Endorsing Retail Banking

The Central bank has warned banks to quit giving importance to bulk deposits

In a report, Trends and Progress of Banking in India 2008-09, the Reserve Bank of India has warned banks to quit giving too much importance to bulk deposits and instead concentrate more on retail operations and thereby reduce their risk quotient to tolerable levels.

This message is being sent in the wake of what happened last year in September-October when corporates and other institutional depositors withdrew the huge deposits they had with banks causing a crisis. Now, that the economic recovery is underway, most banks have gone back to the old system of kow-towing to institutions from where mega-fund flows happen.

Increasingly, banks have become too dependent on bulk deposits to fund credit growth and they are not really looking for other sources of collecting money that would diversify their incoming sources as well as give them much greater credit disbursal power. It could have deleterious liquidity and profitability consequences.

As such, RBI has indicated that relying on bulk deposits can be counterproductive. In fact, it refers to these deposits as 'purchased liquidity'. What banks can do in this situation, says RBI, is to improve and shore up their liquidity management by giving greater importance to marshalling retail deposits.

While these are small scale funds, yet they add up to huge amounts if hundreds of thousands of new depositors are mobilised in an effective manner. And, despite some of these deposits having a proclivity for the shorter term, yet that problem can be surmounted gradually.

“While at an individual customer level, retail deposits may be volatile, but for the banking system it provides a foundation to fund banks' longer term assets like infrastructure and other business activities,” RBI said.

Aong with this new emphasis, RBI has sent a warning that this can be done well only if banks stick to the know-your-customer (KYC) norms. In case banks fail to do so, RBI said it would be forced to intervene.

The ability to rustle up big amounts from retail deposits will provide banks with a solid foundation to fund infrastructure and other economic expansionary intent of corporate India.

The central bank has acknowledged that getting a proper system up and running will be a challenge for banks.

The current account and savings account (CASA) deposits, which are funds that draw interest  rates that are extremely low and yet serve as a very imnportant source of raising resources for banks, have declined, said the central bank.