Households Shift Savings, Raising Bank Liquidity Concerns

The Finance Ministry has alerted Parliament about the growing trend of households transferring their savings from banks to market-linked financial instruments in search of higher returns. This shift poses significant risks, as families may face substantial monetary losses during market downturns. The Department of Financial Services has highlighted that this movement reduces banks’ liquidity, complicating their funding management.

Risks of Market-Linked Investments

In a recent written response to a parliamentary standing committee, the Finance Ministry expressed concerns regarding the potential risks associated with households moving their deposits. The ministry noted that many families lack adequate financial literacy and risk assessment capabilities, making them vulnerable to market fluctuations. As households withdraw their savings in favor of higher returns, banks experience a decline in low-cost funding sources, which can lead to increased funding expenses. This trend could have broader implications for the financial stability of banks and the economy as a whole.

The committee’s report, presented in Parliament, emphasized the need for preemptive measures to address these liquidity challenges. It recommended enhancing customer engagement, particularly in underserved regions, and adopting technological solutions to improve operational efficiency. These steps aim to mitigate the adverse effects of declining current account savings account (CASA) ratios, which are crucial for banks’ liquidity management.

Recommendations for the Insurance Sector

The committee also addressed the budget proposal for complete foreign direct investment (FDI) in the insurance sector. It underscored the necessity of implementing protective measures to safeguard domestic interests. Key concerns include managing profit repatriation to foreign entities, preserving the decision-making authority of local companies, and ensuring job security amid potential automation. Furthermore, the committee warned against a focus solely on profitable policies, which could lead to neglecting rural areas and economically disadvantaged communities. It urged that these challenges in India’s insurance sector be managed with diligence and care to ensure equitable access to insurance services for all segments of society.

Rising Complaints and Account Management

Another significant issue highlighted by the committee is the alarming increase in complaints under the Reserve Bank of India’s Integrated Ombudsman Scheme. Over the past two years, complaints have surged by nearly 50%, reaching approximately 934,000 in the current fiscal year. The committee recommended establishing robust systems to address grievances across various sectors, ensuring that customer concerns are resolved efficiently. Additionally, the committee stressed the importance of maintaining active Jan Dhan accounts to prevent dormancy and fraud. It proposed implementing thorough verification processes and regular monitoring of account activities. The committee emphasized that discrepancies should be investigated thoroughly, and accounts that remain inactive for extended periods or are found to be fraudulent should be deactivated promptly. These measures aim to enhance the integrity and reliability of the banking system.

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