• Aditya Natani

Banks in a big time trouble

Let’s firstly understand how banks basically function. Banks take deposits in various forms and pays interest on the same to depositors. Out of the total deposits, banks lend money to those who are in need of the same and charge interest for the same. The interest charged by bank is usually higher than interest paid by bankers on deposits, and the difference is the interest earnings, which forms major part of banking sector revenues.

Now let’s go through the basics of repo and reverse repo rates. Repo rate is the rate at which Reserve Bank provides loans to the banking institutions, whereas reverse-repo rate is the rate at which RBI borrows from the bank. Now many of you would hard it find to link how change in rate of repo rate affects your loans. If banks would get loans at cheaper rates they will pass on the benefits to the ultimate consumers hence reduction in overall lending rates, see the illustration below:

RBI governor has announced around 1.50% reduction in repo-rate since January 2015, which has further forced commercial banks to reduce their base rates. Reduction in lending rates ultimately narrows down the gap between the deposit and lending rate shrinking further the profits of the banks. To avoid such situation banks reduce the deposit rates as a consequence of which banks deposit growth is at a 5 decade low and requirement for loans is increasing YoY. The credit to deposit ratio is currently at 77.6% i.e. banks are lending Rs 77.60 on every Rs 100.00 deposited, which has increased from 76.5% during the corresponding period last year. Senior government officials have further indicated that if commercial banks don’t comply with recent rate-cut they will start pressurising the banks for rate-cut.

In the meanwhile collapse of Vivekananda Flyover in Kolkata on 31st March 16, which led to killing & injuring of nearly 22 & 75 respectively, which was built by IVRCL which has an exposure of Rs 10,370 cr to consortium led by SBI, PNB & Union Bank has further reduced the chances of its recovery of the same which had already gone in the process of strategic debt restructuring furthering the plight of NPAs in the sector.

Although Rajan has been trying hard to balance the growth motives and liquidity crises in the market, its time to take tough calls for banking industry including the one already taken by giving ultimatum to banks to ‘clean’ their books by fiscal 16-17. Also government instead of pressurising commercial banks to reduce rates should provide them respite by lowering deposit rates. If all work in tandem with each other pressurising will take form of pursuing.
18 views0 comments
  • Grey Twitter Icon
  • Grey LinkedIn Icon
  • Grey Facebook Icon

© 2020 by Economic Watch.