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)
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