Reserve Bank of India Governor Sanjay Malhotra has called upon urban cooperative banks to maintain high standards of governance, emphasizing that strong oversight underpins the stability and credibility of the cooperative banking sector. The governor made these remarks during a meeting in Mumbai with chairpersons, managing directors and chief executive officers of select urban cooperative banks as part of RBI's ongoing engagement with regulated entities.

Key Focus Areas Highlighted

During his address, Malhotra outlined several critical areas requiring attention from UCB leadership:

Role in Financial Inclusion

The governor acknowledged the continued relevance of UCBs in credit delivery, particularly emphasizing their importance in underserved and semi-urban areas. He noted that the sector remains an important pillar of the formal financial system, especially for small borrowers, local businesses and communities that are often outside the reach of large commercial banks. This recognition underscores the strategic importance of UCBs in furthering financial inclusion across India.

Regulatory Initiatives and Reforms

Malhotra referenced various policy initiatives undertaken by RBI for the cooperative banking sector since the previous interaction held on 19 March 2025. The governor expressed confidence that these measures would act as enablers for the sector to strengthen itself and grow in a healthy and sustainable manner. While specific steps were not detailed, he indicated that regulatory reforms and supervisory actions were aimed at improving resilience and long-term viability of the sector.

Customer-Centric Approach

Beyond financial soundness, the governor emphasized the need for UCBs to adopt a customer-centric approach. He called on banks to:

• Adhere to ethical practices in all operations
• Ensure timely grievance redressal mechanisms
• Maintain transparency in their dealings with customers
• Preserve depositor confidence through sound practices

Malhotra noted that customer trust was central to the sector's relevance and continued growth, making these practices essential for long-term sustainability.

Meeting Participation and Dialogue

The meeting saw participation from senior RBI leadership, including Deputy Governors Swaminathan J. and S.C. Murmu, along with other senior RBI officials. Representatives from the National Urban Cooperative Finance and Development Corporation Ltd and the National Federation of Urban Co-operative Banks & Credit Societies Ltd were also present. During the interactive session, participants shared feedback and suggestions on policy and operational issues affecting the sector, reflecting the ongoing dialogue between the regulator and cooperative banks.

Axis Bank Managing Director and CEO Amitabh Chaudhry has issued a stark warning about the sustainability of India's banking system, highlighting the growing divergence between deposit and credit growth rates that threatens the sector's ability to support the country's economic expansion. Speaking at the World Economic Forum 2026 in Davos, Chaudhry emphasized that the current imbalance cannot persist indefinitely if India aims to maintain its growth trajectory.

Deposit-Credit Growth Imbalance Poses Systemic Risk

The banking sector faces a critical challenge as deposit growth remains constrained while credit demand accelerates. Chaudhry outlined the severity of this mismatch, noting that expectations for credit growth have risen significantly while deposit mobilization lags behind.

"If people are talking about credit growth of 15–17%, deposits will have to get there at some point. Both cannot diverge indefinitely," Chaudhry stated, emphasizing the mathematical impossibility of sustaining such divergent growth rates.

RBI Liquidity Support Requires Enhancement

Chaudhry acknowledged the Reserve Bank of India's commitment to providing durable liquidity but argued for more consistent intervention. He criticized the current approach, noting instances where liquidity conditions have deteriorated due to RBI market interventions. The CEO stressed that durable liquidity should mean "constant, continuous liquidity so that people can plan and act accordingly."

A significant factor contributing to liquidity tightness is the elevated government balances parked with the RBI, which Chaudhry identified as among "the highest we've seen in the recent past." This situation compounds the deposit growth challenge by reducing systemic liquidity availability.

Structural Shifts in Deposit Composition

The banking sector confronts not just slower deposit growth but also fundamental changes in deposit composition. Chaudhry highlighted a structural shift driven by increased retail participation in equity markets, which is altering the nature of deposits flowing into the banking system.

"As Indian retail investors invest more in the stock market, more of the deposits coming back into the banking system are wholesale rather than retail—and they come at a price," he explained. This shift has significant implications for bank funding costs, as wholesale deposits are market-priced and typically more expensive than traditional retail deposits.

The CEO noted that simply raising retail deposit rates would not effectively address the challenge, since "wholesale deposits are market-priced. Large depositors bid it out, and the market pays what it is willing to pay."

Foreign Investment Validates Sector but Cannot Solve Core Issues

Regarding recent foreign investments in Indian banks and NBFCs, estimated at nearly ₹15.00 billion across multiple deals, Chaudhry acknowledged the positive validation of India's financial services opportunity. However, he cautioned that capital infusion alone cannot address the fundamental funding challenge.

"Capital is important, but real balance sheet growth comes only when you get deposits in," Chaudhry emphasized, noting that financial institutions remain among the most leveraged entities globally. He pointed out that while foreign brands may be well-known internationally, they lack recognition in India, making deposit mobilization equally challenging for them.

Economic Growth Outlook and Banking System Requirements

Chaudhry expressed optimism about the IMF's recent upgrade of India's FY26 growth forecast to 7.30%, viewing it as validation of ground realities. He believes India should be capable of achieving 7-8% growth, provided the banking system can adequately support such expansion through improved deposit mobilization.

"If RBI wants the economy to grow and deliver 7.40% growth and similar numbers next year, then the economy has to be funded. That means deposits have to catch up," Chaudhry concluded, linking deposit growth directly to India's broader economic ambitions and emphasizing the critical role of banking sector health in sustaining national growth momentum.