Recently, the Reserve Bank of India (RBI) officials, met with MDs and CEOs of public and certain private sector banks on lagging growth in deposits and other issues.
Why have banks been asked to remain “watchful”?
The following three Sources are the primary cause of the Present Global headwinds:
Russian actions in Ukraine impacting energy supplies and prices
Frequent lockdowns in China due to its zero-COVID policy
The increased cost of living because of resulting inflationary pressures
Monetary policies across the globe: Tightening of monetary policies and spurring concerns about financial stability is a common trend that is resulting in:
It is lowering external demand and asking economic growth to be solely driven by domestic demand which might not be sufficiently strong.
Higher global inflation and interest rates are impacting the flow of capital into the economy. It is putting pressure on the domestic currency which is resulting in higher imported inflation.
Imported inflation: Increases in the prices of imported fuels, materials, and components increase domestic costs of production and lead to increases in the prices of domestically produced goods.
How are we placed with respect to deposits and credit growth?
RBI’s latest weekly data:
Aggregate deposits have grown 8.2% in comparison to 11.4% on a year-over-year basis.
Borrowing has jumped 17% in comparison to a 7.1% on a year-over-year basis.
Slow deposit growth:
Deposit rates not going up is a reason for slower deposit growth.
This has squeezed the ability of banks to disburse more loans.
Banks’ Asset quality:
Gross non-performing assets (GNPAs) have consistently declined.
Gross non-performing assets are the sum of all the loans that have been defaulted by the individuals who have acquired loans from the financial institution. Net non-performing assets are the amount that is realized after the provision amount has been deducted from the gross non-performing assets.
Corporate deleveraging: Indian corporates over the years have been able to cut down on their debt level and improve their credit profiles.
Economic Effects of Deleveraging:
Although deleveraging is typically good for companies, if it occurs during a recession or an economic downturn, it can limit credit growth in an economy.
As companies deleverage and cut their borrowing, the downward spiral in the economy can accelerate.
Corporate NPAs are expected to come down: The setting up of the National Asset Reconstruction Company Ltd is expected to take over some of the legacy corporate loan NPAs which are still with banks.