Sunday, June 2, 2013

Banks Liquidity and Govt Deposits With RBI




Liquidity in banking system basically arises out of deposits, recycling of funds refunded by the borrowers and borrowings from the market which include REPO loans taken under LAF. The author is very right in saying that LAF has become more or less a refinance facility as banks depend on these funds to meet  not only their liquidity shortage but also to run their business. The problem of liquidity shortage in banks is caused due to the shift in the form of business in banks. Deposit mobilization which was an essence of banking has been taking a back seat and the rate of growth of deposits has been on the decline particularly when the interest portion is adjusted from the growth. Fresh deposits mobilization and that too in the form of retail deposits has been adversely affected thanks to persisting inflation, preference for gold and other alternative modes of savins, wrong understanding of KYC norms, customer service devoid of personal touch.etc The ever increasing menace of NPAs and restructuring of loans have  been affecting the recycling of funds,  The  increasing trend in term loans as compared to cash credit, bill limits and overdrafts hitherto followed by banks has also affected the liquidity of banks to a great extent.  The author’s suggestion to auction the Govt deposits lying with the RBI can have a favourable impact on liquidity, but it will be only a temporary phenomenon. The banks have to change their present business model  from borrowings  and lendings to mobilizing  funds as deposits  and lending. NPA accumulation needs to be drastically brought down and the concept of restructuing of loans should be reduced to the bearest minimum by having an exit option of bad loans.  

Dr.T.V.Gopalakrishnan
(This comment is in response to an article in Business Standard on RBI should define liquidity by  A Seshan on 1/6/13)

No comments: