Page 57 - Banking Finance July 2024

FEATURES

Banks must ensure adequate resources

for lending

T he Monetary Policy Committee, by keeping the a twin balance-sheet advantage. Banks are now on a strong
repo rate unchanged at 6.5 per cent by a 4:2
footing with remarkable improvement in asset quality,
majority this time round, has indicated that the
robust capital adequacy ratio, improved profitability, and
present elevated interest rate may be on its last
legs. Opinions might be drifting towards easing of the high provision-coverage ratio.
But the growing deposit resource crunch could derail credit
interest rate cycle. With ECB (European Central Bank) deployment. Banks have already increased interest rates on
cutting interest rates to 3.75 per cent from 4 per cent, the deposits. It is evident that against the rise of the repo rate
downward shift in interest rates is gathering pace. Though
by 250 basis points (bps), the interest rate on new term
the RBI is focused on maintaining the right balance between deposit rates has gone up by 244 bps ensuring full
domestic growth and inflation, synchronised action with transmission of interest rates to the deposit segment. For
major global central banks will be imminent.
loans, the weighted average lending rate on fresh loans
Asset-liability management (ALM) of banks could be a increased by 204 bps. Strong banks with weak lending
challenge going forward. Banks are meeting the gaps in capacity due to insufficient incremental deposit growth
frictional liquidity using the liquidity windows of the RBI. could pose greater risks.
Eventually, banks will have to avoid a deficit in durable Growth, inflation, and interest rate trajectory may correct
liquidity. Credit growth reached 15.8 per cent year-on-year itself in times to come. However, it will be interesting to
as of May 17, whereas the deposit growth was trailing, at
see how banks attract deposits under rising competition
12.7 per cent. Such imbalance has continued since the from non-banks including insurance companies. The RBI has
acceleration of credit growth in FY23. However, the data called upon banks to work out different strategies and set
on sectoral deployment of credit indicates that the excessive appropriate business plans. Some of the proposed regulatory
credit exposure to unsecured retail loans and over-reliance
changes in the current monetary policy review could help
of NBFCs on bank funding is moderating. This will reduce the
banks. The definition of bulk deposit has changed from Rs.
credit risk of banks.
2 crore and above to Rs. 3 crore. The RBI had already
In the context of durable liquidity, the marked shift of assured suitable reforms to the framework of liquidity
household savings towards physical savings could exacerbate coverage ratio (LCR) for banks to align with risks.
durable liquidity risks. Also, while a young India — with a Allowing an auto-replenishment facility under e-mandate for
median age of 28 years in 2021 — would be beneficial to recurring payments for FASTag, National Common Mobility
the economy, for banks it could pose certain risks. The young Card (NCMC), etc., will shift some float funds from these
generation of tech-savvy customers, with good financial
entities to banks. Similarly, the auto replenishment of the UPI
literacy, can further shift savings to alternative sources apart Lite wallet will also ensure the placement of funds just in time.
from opting for physical savings. Thus, balancing structural
liquidity in banks will be daunting unless new customers are Product innovation, better customer service, and quick
targeted with product innovation and aggressive marketing. grievance redress systems will be able to improve the
deposit inflows. The onus is now on banks to work out
Strength of Banks business strategies to attract and retain large-scale deposits
The twin balance-sheet malaise of the past has turned into to meet the growing credit needs of entrepreneurs. (Mint)

BANKING FINANCE | JULY | 2024 | 51