With banks facing low deposit growth and the capital market enjoying a boom phase, State Bank of India managing director Ashwini Kumar Tewari has suggested exploration of various avenues, including a cut in the cash reserve ratio (CRR) or the proportion of deposits which banks are mandatorily required to park with the Reserve Bank of India (RBI).

The government could also offer tax benefits to encourage individuals to keep more money in bank deposits, Tewari said. 

Incidentally, India faces the worst deposit crunch in two decades and credit is growing at a faster pace.

“Taxation benefits could be given… Some alignment could be done with investments linked to deposits,” Tewari said.

Conversations between banks and the RBI for a cut are on, Tewari told reporters, but clarified that SBI does not need such a reduction as it is well placed on the liquidity front.

There has not been any formal request for a CRR cut made either, he added.

Speaking at a BFSI event organised by CareEdge Ratings, Tewari said, "We have to look at various avenues for helping tide over the challenge posed by lower deposit growth".

To a question on whether the bank has sought a CRR cut, he said, "We have not sought any formal dispensation, but it is a conversation we continue to have. I don't think there is any move to do this at the moment".

When asked if a CRR cut will help banks tide over the continuing wedge between the credit and deposit growth, he said, "Of course, it will help".

Tewari said bank deposits are really important as 90% of all economic activity is funded by the banks.

SBI's statutory liquidity ratio (SLR) or investments in government bonds are 2-3% higher and hence, it may not benefit as much. But there are banks running credit-deposit ratios of up to 90% for whom the CRR cut, which expands the lendable resources for a bank, will be of help.  

The RBI had mandated a sharp CRR cut following the outbreak of Covid-19, but this was raised again and now stands at 4.5%.

Tewari said rate hikes have been fully transmitted by the lenders in the system. A stiff competition among lenders was leading to aggressive pricing and lower spreads. This is even leading to cases where the rate offered to get the best quality loans at lower than the deposit rates.

He said the banking system would have got a much larger share of deposits had the focus not shifted to mutual fund investments or direct exposure to equity markets.

"We are at the seventh or eighth quarter when the bank deposit is lagging the loan growth not only in percentage terms but also in absolute terms. This puts a lot of pressure on the funding requirements for banks," he said.

Tewari said ex-depositors are getting into the capital market segments like futures and options and pitched for regulatory intervention on the same.

"People do not understand, that there has to be some controls which hopefully will come through," he said.

The share of the low-cost current and saving account (CASA) deposits available with the banks are also lower at just over 30% even though the headline numbers would say the numbers are over 40%, he said. Banks are seeing a significant shift in customer deposits from CASA to higher yielding fixed deposits (FDs) and other investment avenues such as mutual funds and equities.

This will ensure that the pressure on net interest margins will continue, he said.

Tewari also batted for the introduction of long-term measures like the transition to an expected credit loss-based provisioning system at present, when the going is good for the banking sector.