Why RBI and the Government Want Banks to Focus on Core Banking Solutions

Updated On : October 2024

In a recently held press conference, followed by a post budget meeting with the Central Board of Directors of the Reserve Bank of India (RBI), Union Finance Minister Nirmala Sitharaman urged banks to focus more on core banking solutions. She emphasized on concentrating on core banking due to the challenges faced by the Indian financial sector in recent times.

The message was clear that banks need to pay more attention to their core activities of collecting deposits and lending. “The RBI and the government are repeatedly urging banks to refocus on what they do best and to lend with more stringent measures,” she stated. This directive comes at a time when there are concerns about the present state of banking operations, which require a more focussed approach.

One of the major issues that were highlighted during the press conference was the growing gap between deposit collection and lending. RBI governor Shaktikanta Das pointed out this gap has exceeded 300 basis points, which is a cause of concern. These findings indicated that banks are lending at a faster rate than they are accumulating deposits, which could potentially lead to liquidity issues if ignored.

Speaking at the meeting, Das emphasized that banks need to come up with innovative products and strategies to increase deposits. The need of the hour is to strike a balance between adhering to traditional banking principles and adapting to the digital age. New schemes with attractive features can be introduced to attract deposits. “There are potential risks and imbalances in banking operations which was conveyed in the recently announced policy on August 8th,” said the RBI governor.

This vigilance demonstrates the collaborative efforts between the central bank and the government to maintain financial stability in the banking sector. According to the governor, one of the options available for banks is to focus on increasing their CASA (Current Account Savings Account) deposits by raising interest rates on savings accounts. Since these deposits are cheaper for banks compared to term deposits, they present an ideal option for maintaining liquidity.

The finance minister’s appeal to banks to introduce innovative deposit schemes and a new range of products could lead to increased competition among banks. This, in turn, may benefit consumers through better interest rates and improved banking products. The call for innovation certainly indicates an acceleration in the core banking activities of banks.

Furthermore, the RBI has issued a framework for lenders financing infrastructure, non-infrastructure, and commercial real estate projects. According to this drafted framework, lenders would be required to set aside up to 5 percent of outstanding exposures, increased from the current 0.4 percent, which would create a buffer against potential losses in these high-risk sectors.

The announcement of this draft evoked strong reactions, particularly from project developers, who expressed concern that higher provisioning requirements might deter banks from financing infrastructure and real estate projects. An increase in borrowing costs could also impact the sector, as banks might raise interest rates. Additionally, there is fear among project developers about securing financing for existing projects.

The finance minister has addressed these concerns by stating that there are dedicated institutions for long-term financing, such as the National Bank for Financing Infrastructure and Development (NaBFID). She strongly advised that public sector banks and scheduled commercial banks should refrain from long-term lending and avoid using funds borrowed for short-term purposes, as this could lead to an asset-liability mismatch.

In conclusion, Indian banks need to adapt their strategies and rethink their lending frameworks in line with the expectations set by the RBI and the government. This will require reassessing their products and overall business models to ensure a better focus on core banking solutions. The directive marks a potential turning point for the Indian banking sector. As banks navigate this new landscape, we can expect to see a blend of traditional banking and innovation that will transform the sector.

If executed well, this refocus could lead to a stronger banking sector that is well-equipped to support the country’s economic growth aspirations.

In this evolving landscape, Nelito Systems is committed to providing innovative Core Banking Solutions that empower banks to adapt to these new expectations. Our solutions are designed to enhance operational efficiency, support compliance, and drive customer engagement, enabling banks to thrive in a competitive environment. As the banking sector transforms, Nelito Systems will continue to be a trusted partner in helping banks achieve their strategic goals and support the country’s economic growth.