The Deposit Squeeze Is Exposing Banks’ Balance Sheet Blind Spots

Amid structural shifts in the race between credit and deposit growth, deposits tend to lag because of a demographic shift in the customer base. New-age customers are increasingly choosing alternative investments instead of keeping their savings in banks, creating new risks for the banking system.

This structural shift in assets and liabilities is not a transitory phenomenon that can be managed merely through market borrowings to address liquidity risk, which is often the tipping point for wider risk. Holistic balance sheet management has therefore become crucial, with a granular focus on every asset item that carries a risk weight, or a measure of riskiness.

Balance sheets and financial statements reflect the pulse of inherent risks, profitability trends and capital quality, which is the buffer against business risks, along with several finer qualitative dimensions. If studied meticulously, they can reveal incipient risks before those risks impede performance.

In pursuing business goals and competing targets in silos, banks may often ignore early signs of risk hidden beneath immediate, aggregate balance sheet data points. 

The balance sheet should, therefore, be read along with a wide range of qualitative information that may not appear as a balance sheet item today but can influence it over time.

This includes:

• Market share

• Product profile

• Customer grievance trends

• Compliance standards 

• Digital efficiencies, 

• Preparedness to withstand cyberattacks

• Borrower and depositor profiles

• Changing banking patterns, 

• Cash withdrawal trends, 

• Peer comparisons, 

• Product usage density, 

• Branch network, 

• Digital distribution channels, 

• Shifting customer usage patterns, 

• Underused banking infrastructure that can drag on profitability. 

In a large banking entity, the list of qualitative market intelligence that can reshape future balance sheet data is extensive and must be assessed for its potential impact on performance.

Regulatory Focus
Regulators remain mindful of the sustainability of regulated entities. Accordingly, SEBI and RBI prescribe mandatory disclosure standards with the twin objectives of alerting regulated entities and keeping the investor community informed. These disclosures help stakeholders interpret risk appetite, growth prospects and potential future risks.

Under the supervisory review process prescribed in the Basel II framework, the RBI verifies the authenticity of several such disclosures and conducts risk-based supervision to ensure compliance with regulations in both letter and spirit.

The RBI also keeps a close watch on compliance culture to ensure that risks remain within the stated risk appetite. The task of building the size and quality of the balance sheet, however, is left to individual regulated entities. Operational freedom to compete and grow remains with them unless regulatory concerns surface.

In the same macroeconomic, business and regulatory environment, some regulated entities build strong balance sheets while others lag. The reasons can include governance quality, ethical values, compliance standards, risk culture, leadership drive and institutional capacity to harness growth.

More important, however, is the ability to pinpoint early signs of risk and devise timely methods to mitigate them. Balance sheet strength is not merely the result of growth; it is the result of growth that is aligned with risk, capital and institutional capability.

Strategic Vision
Solutions to the new asset-liability management structure, shaped by changing customer preferences, do not lie in short-term fixes. A continuous tilt in customer behaviour calls for corrections in the structure, size and composition of the balance sheet.

Beyond tactical performance parameters targeted year after year, banks need a strategic balance sheet vision for the next four to five years, keeping the current asset-liability mix in view. How the business is expected to evolve, and how the balance sheet should look in the coming years, must be clearly articulated to assess and manage risks.

Consistent planning, a convincing top-down approach and inclusive institutional effort can bring about such a shift in balance sheet composition.

The banking system’s assets grew from ₹220 trillion in 2022-23 to ₹330 trillion by 2025-26, recording annual growth rates of 12.8% and 13.4%, respectively. During the same period, deposits rose from ₹214 trillion to ₹262.3 trillion, with growth rates of 7.8% and 13.47%. Credit increased from ₹136 trillion to ₹214 trillion, posting growth rates of 14.3% and 16.1%.

Credit growth exceeded deposit growth by 650 basis points in 2022-23 and by 263 basis points in 2025-26. Assets tend to grow more slowly than credit because the balance sheet carries several other items, each with corresponding risk weights that indicate inherent risk.

Banks should be able to estimate future balance sheet risks on a notional basis, especially when business numbers are already being projected. If this is done annually, it should also be extended over the next few years to align with the organisation’s strategic vision and expected performance levels.

Since each type of risk eventually gets built into the balance sheet, there should be fewer surprises when pursuing growth and shaping a risk-adjusted balance sheet position.

Banks should build strong back-office teams for balance sheet management. These teams must monitor each balance sheet item and its risks, study how and why actual levels differ from estimated levels, and determine what interventions are needed to keep the balance sheet on expected lines.

Regional and zonal balance sheets, along with their embedded risks, should be discussed in business review meetings so that deviations are corrected in time. The purpose of identifying risk is not to avoid risk, but to manage it mindfully within the policy and regulatory framework.

If balance sheet growth is strategically carved out, it can be kept lighter in terms of risk weight, consume less capital and still remain focused on generating sound revenue. But this requires sharper strategic focus and a long-term vision for holistic balance sheet management.

The core issue is to pursue business growth while assessing how performance parameters will affect balance sheet size, composition and riskiness. Banks must remain competitive without allowing today’s growth to create risks that become counterproductive later.

Prioritising balance sheet management will strengthen integrated risk management systems, help ring-fence banks against shifting business risks and align banking strategy with changing customer preferences.