G.N. Bajpai: India’s banking industry needs a complete organizational revamp
Debates on the significant decline in India’s GDP growth rate in the second quarter of 2024-25 and the revised estimates of growth for the year have been all over the media. The narratives have ranged from it being a secular decline to just a quarterly blip. Pundits have volunteered diagnoses and prescriptions accordingly. However, the trend of slower credit growth has received little attention; the why of it, even less so.
Credit growth as on 15 November was just 15%, compared to 20.6% last year. In fact, in the month of October 2024, rural credit slowed from 13.4% to 12.9%, non-food credit from 13% to 11.5%, industry credit from 8.9% to 7.9% and non-bank financial company advances from 9.5% to 6.4%. Credit growth has been sliding for several months.
For the year 2024, bank deposit growth is reported to be higher than loans sanctioned. But that was deliberate, aimed at bringing down the credit-deposit (CD) ratio, and was not enabled by a pick-up in deposit growth. After meeting Statutory Liquidity Ratio and Cash Reserve Ratio requirements, a healthy CD ratio works out to be between 65% and 75%. A lower sum of loans disbursed against the growth in deposits has pushed down the CD ratio to 78.9% for the fortnight ending 4 October 2024. Even now, the incremental CD ratio for the full year is 89.5%.
Also Read: Budget 2025: Tax incentives, higher deposit insurance key asks for banks
Such high ratios leave very little room to meet emergency capital requirements. Banks have been relying on short-term borrowings like certificates of deposit, etc, to meet the gap between loans disbursed and deposits. This gives rise to low-lying systemic risk. In the not-too-distant past, such a risk in the non-banking financial sector had to be navigated with a lot of sweat and toil.
In an oped published in this paper in August, this author had observed that the Indian savings and investment market is undergoing a structural shift. Even though the capital market may now be undergoing a correction, money is unlikely to flow back to bank deposits. Former Reserve Bank of India governor Shaktikanta Das had recognized the challenge of lower deposit growth and asked commercial banks to mobilize larger amounts. However, effective measures to deal with the issue are not on the horizon yet. Leaders of banks seem to harbour hopes of ‘the prodigal’s return.’
Also Read: Indian banks are staring at worrisome savings and investment trends
India’s GDP growth rate is under pressure, inter alia, from weak credit growth. Disappointing private capital investments are one part of this story, and the regulator’s cautionary approach is a factor, but a major dampener of economic activity is low deposit growth having diminished the capacity of lenders to lend. This warrants urgent policy action by the regulator as well as bank managements.
Alternate avenues of financing banks must be worked upon. An option is bulk borrowing from the debt market—both domestic and global—and institutions like insurance companies, pension funds and provident funds, which mobilize long- term savings and must invest a significant share of their corpus in fixed-income securities. Policies should be re-oriented to foster a more vibrant debt market.
Bank margins between the cost of liability creation and returns on assets can no longer measure up to historical trends ranging from 3% to 5%. The renewed focus of India’s insurance and mutual fund regulators on reducing intermediation fees and margins on money transfers, etc, will dampen banks’ non-core income.
The days of “lazy banking,” as former RBI deputy governor Rakesh Mohan called it, have been blown away by winds of change under the new investment climate. Greater unsecured lending in the last couple of years suggests that non-performing assets (NPAs) may rise and the risk premium charged may turn out to be inadequate. Higher NPA provisioning in the last quarter by most banks validates this expectation.
Also Read: Legal audits hold the key to address loan write-offs by Indian banks
The current organizational design of banking as an industry is based on high net interest margins (NIMs). India needs a new architecture that is lean and mean, with clearly delineated value-creation pillars, rewritten responsibility and accountability frames, and with old technology replaced by AI-driven dynamic platforms. Virtual banks are waiting in the wings to give today’s monoliths a run for their money.
The central bank should loosen its stranglehold on the debt market and re-engineer its policy approaches to facilitate bulk borrowing by banks. RBI should also allow the trading of Tier II bonds to create additional liquidity and promote mass participation in the market for long-term (stable) bank debt. Complementary rules should be laid down for efficacious superintendence of a steady transformation in the framework of liability creation by banks.
Banks have long been basking in the appeal of a ‘pull product’ in the form of retail deposits. They will now have to live with ‘push products.’ This would mark a 180° turn. Banks will have to get their credit-worthiness rated, be prepared for deeper scrutiny of balance sheets by new eyes, and replace armchair banking with footwork.
Just last month, the Bank Nifty index lost 5.3%, compared to the broader Nifty 50’s 2.3% loss in market capitalization. Deficient ‘total shareholder returns’ offered by capital-market darlings in the past couple of years are a compelling argument for the reincarnation of India’s banking industry.
Deepali Garge of National Insurance Academy contributed to the article.
The author is former chairman, Life Insurance Corporation of India and Securities and Exchange Board of India.
Post Comment