Bank Deposit Scheme

FM Nirmala Sitharaman Urges Banks to Initiate a Deposit Mobilisation Drive for Financial Growth

In a recent move to safeguard the stability of the banking sector, Finance Minister Nirmala Sitharaman urged public sector banks to step up their deposit mobilisation efforts. This directive comes at a crucial time when the growth in bank deposits is lagging behind the surge in loan demand. The push for deposit mobilisation aims to bridge this gap, ensuring that banks have the necessary liquidity to support lending activities.

Why the Push for Deposit Mobilisation?

Banks are currently facing a challenge: while the demand for loans continues to grow, deposits are not keeping pace. This imbalance, if left unchecked, could pose a systemic risk to the financial system. The Finance Minister’s call to action is a proactive measure to prevent such risks by encouraging banks to focus on increasing their deposit base.

The Changing Investment Landscape

Recent data from SBI Research highlights a significant shift in investment preferences, particularly among younger investors. Traditionally, bank deposits have been a go-to option for their safety and liquidity. However, younger generations are now gravitating towards riskier assets like mutual funds and equities, which offer higher returns despite the associated risks.

Senior Citizens Still Favor Deposits

While younger investors are moving away from bank deposits, senior citizens continue to rely on them as a secure investment option. The SBI report indicates that nearly 47% of term deposits are held by senior citizens, who benefit from slightly higher interest rates and tax exemptions. This demographic shift is crucial as it underscores the need for banks to rethink their strategies to attract a broader customer base.

The Taxation Dilemma

One of the key factors contributing to the declining appeal of bank deposits is their tax treatment. Deposits are taxed on an accrual basis, meaning that interest earned is taxed annually, even if it is not withdrawn. This can be less attractive compared to investments like mutual funds, which may offer more favorable tax treatment.

SBI’s Recommendations on Taxation

To address this issue, SBI economists have recommended a review of the tax structure for bank deposits. One suggestion is to tax deposits at the time of redemption rather than on an accrual basis. This change could make deposits more attractive, particularly for younger investors who are currently deterred by the annual tax burden.

The Importance of Building Customer Relationships

During her meeting with public sector bank chiefs, FM Sitharaman emphasized the importance of building stronger relationships with customers. She suggested that banks should focus on reaching out to customers, particularly in rural and semi-urban areas, to encourage deposit growth. By understanding and addressing the needs of these customers, banks can foster loyalty and increase their deposit base.

Strengthening Cybersecurity Measures

In addition to deposit mobilisation, the Finance Minister also highlighted the importance of strengthening cybersecurity measures. With the increasing reliance on digital platforms, banks must ensure that their systems are secure against cyber threats. FM Sitharaman advised banks to adopt a collaborative approach involving the government, regulators, and security agencies to safeguard their IT systems.

A Call for Periodic IT System Reviews

To further enhance cybersecurity, FM Sitharaman urged banks to conduct regular and thorough reviews of their IT systems from a cybersecurity perspective. This proactive approach will help prevent potential breaches and ensure that the security of bank systems remains robust.

The Shift in Investment Trends

The SBI report also sheds light on the changing trends in the investment landscape. Mutual fund accounts have seen a nearly fivefold increase, from under 4 crore in March 2014 to over 19 crore in June 2024. However, the number of unique investors has only grown marginally, indicating that many investors are diversifying their portfolios across multiple funds.

Implications for Banks

For banks, these trends signify the need to innovate and offer more attractive deposit products to compete with other investment options. Banks must also consider the preferences of different demographic groups, such as the younger generation’s inclination towards equities and the older generation’s preference for traditional deposits.

The Role of Financial Education

Another critical factor in deposit mobilisation is financial education. By educating customers about the benefits of bank deposits and addressing misconceptions, banks can encourage more people to invest in these secure options. Financial literacy campaigns, especially in rural and semi-urban areas, can play a significant role in this effort.

The Future of Bank Deposits

As banks navigate these challenges, the future of bank deposits will depend on their ability to adapt to changing investor preferences. By offering competitive interest rates, revising tax structures, and enhancing customer relationships, banks can make deposits a more attractive option for a wider audience.

Conclusion

Finance Minister Nirmala Sitharaman’s call for a deposit mobilisation drive is a timely and necessary step to ensure the stability of the banking sector. With the right strategies in place, banks can increase their deposit base, support lending growth, and maintain the overall health of the financial system.

FAQs

1. Why is deposit mobilisation important for banks?
   Deposit mobilisation is crucial because it ensures that banks have enough funds to support loan growth. Without adequate deposits, banks may face liquidity challenges, leading to potential systemic risks.
2. How does the tax treatment of bank deposits affect their attractiveness?
   The current tax treatment, which taxes deposits on an accrual basis, can make them less attractive compared to other investment options like mutual funds. Taxing deposits at the time of redemption could make them more appealing.
3. What role do senior citizens play in the deposit market?
   Senior citizens hold a significant portion of term deposits, benefiting from higher interest rates and tax exemptions. Their preference for secure investments underscores the importance of catering to this demographic.
4. How can banks improve their customer relationships?
   Banks can improve customer relationships by reaching out to customers, particularly in rural and semi-urban areas, understanding their needs, and offering tailored deposit products.
5. Why is cybersecurity important for banks?
   As banks increasingly rely on digital platforms, robust cybersecurity measures are essential to protect against cyber threats and ensure the security of customer data and bank systems.

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