In a significant development for the banking sector, authorities are considering allowing banks to accept term deposits with a tenure of less than seven days. This move could provide depositors—especially corporates and institutions—greater flexibility and improved returns on surplus funds, while also helping banks manage their liquidity needs more efficiently.
Suggestions Sought From Banks for Effective Implementation
Proposal Aims to Address Challenges of Slow Deposit Growth and Liquidity Crunch
The banking regulator has sought input from various banks to examine the feasibility of this proposal. The move comes in the wake of recent data indicating sluggish deposit growth: as of May 2, 2025, annual deposit growth stood at 13%, a drop from 10% in the previous year. The proposal seeks to tackle this slowdown and offer an attractive option to depositors seeking short-term investments.
Benefits for Depositors and Banks Highlighted by Experts
Shorter Tenure Deposits to Attract Surplus Funds and Improve System Liquidity
Experts suggest that, if implemented, the new scheme would allow corporate entities and large depositors to park their excess funds for better returns even for very short periods. This flexibility could enhance overall deposit mobilization for banks and improve liquidity in the financial system.
However, experts also caution that while such deposits may help banks raise funds quickly, robust risk management measures would be necessary to ensure financial stability.
SBI Research: Interest Rate Trends Create Urgency for Deposit Reform
Short-Term Deposit Products May Help Banks Address Funding Pressures
A recent report by SBI Research pointed out that declining interest rates have intensified pressure on banks to attract deposits. In this context, enabling banks to offer term deposits of less than seven days could help boost their deposit base and manage liquidity more effectively.
Historical Context: Precedent Set in 2004 for Similar Measures
Previous Policy Changes Show Positive Impact on Deposit Mobilization
The move recalls similar regulatory changes introduced in 2004, which allowed for greater flexibility in deposit products and led to improved mobilization of surplus funds by both public and private banks. Experts believe that the latest proposal, if implemented, could yield similar benefits.
Potential Advantages: Enhanced Returns, Better Liquidity, and Flexible Investment Options
1. Boost in Deposit Mobilization:
This proposal will provide an attractive investment option for corporates and individuals with surplus funds, thereby increasing the overall deposit base of banks.
2. Improvement in Banking System Liquidity:
Allowing short-term deposits is expected to help banks better manage liquidity and respond to funding challenges arising from slow deposit growth.
3. Greater Flexibility for Investors:
Corporates and large depositors will be able to earn higher returns on surplus funds, even for tenures shorter than a week.
