At a time when deposit growth is lagging behind credit offtake, public sector banks have made a strong pitch to the finance ministry, requesting that government cash balances be maintained by them rather than the Reserve Bank of India. This change, they claim, would increase the percentage of low-cost current and savings account (Casa) deposits, which have been declining.
In 2021, the government adopted a new framework on the SNA-SPARSH platform to improve the flow and monitoring of funding under Centrally Sponsored Schemes (CSS). Under this method, government cash holdings were transferred to the RBI rather than commercial banks.
Bankers complain that this shift has decreased float funds, affecting operating efficiencies. This has increased the cost of deposits and reduced banks' net interest margins.
To address these concerns, bankers made a thorough presentation to the government, emphasizing the potential benefits of returning government cash reserves to authorized institutions. Banks store float monies in interest-bearing savings accounts, but the RBI does not pay interest on cash balances.
They say that the 2021 move has cost the government money through lost revenue.
In a meeting with Finance Minister Nirmala Sitharaman earlier this week, senior banking executives suggested that government cash reserves be stored with specified banks to assist them weather the present liquidity crisis. According to the most recent figures, the government's cash balance stood at Rs 2.1 trillion on August 9, but has subsequently fallen as post-election government expenditure has increased.
Bankers also noted that the updated methodology has broader ramifications for the central bank's liquidity management, as it impacts systemic liquidity across the banking sector. Most banks' proportion of low-cost casa deposits has decreased over the last year. State Bank of India, for example, had its Casa ratio fall from 42.88 percent at the end of the first quarter of FY24 to 40.7 percent in FY25.
According to the most recent RBI statistics, deposit growth has lagged behind credit growth, with bank loans growing by 13.7% year on year while deposits increased by only 10.6%. Both Sitharaman and Reserve Bank of India Governor Shaktikanta Das have urged banks to increase deposit mobilization in order to maintain credit growth's long-term viability. During a recent meeting, the finance minister pushed banks to launch special deposit-boosting campaigns.
The RBI has also warned banks not to rely too heavily on short-term corporate deposits, since this might lead to structural liquidity issues. In response, several banks have raised deposit rates and introduced new plans that provide larger rewards to depositors. However, this might further reduce net interest margins in subsequent quarters.
