Monetary policy: More needs to be done
The monetary policy announced by the Reserve Bank for the second quarter is on expected lines.
In the context of a mixed backdrop of persistent sluggishness in advanced economies, positive signals of growth in developing economies, continued inflationary pressures in domestic economy and the need to maintain the trajectory of GDP growth in the region of nine per cent, the Reserve Bank has very limited choice to venture into any dynamic policies although the inflows of foreign exchange continue to disturb the exports, exchange rate, current account deficit, money supply, inflation, liquidity and interest rate and demand a separate treatment.
Growth of economy
Earlier, measures and professional approach of the Reserve Bank have paid off very well in ensuring steady growth of the economy at around 8.5 per cent. It may even cross nine per cent by March 2011 provided industrial, export and import growth maintain the present trend.
Even agricultural production can be better in view of the favourable monsoon this year. The non-food credit pick-up has been on the projected lines at around 20 per cent and would continue to persist/improve further.
consumer confidence index
The consumer confidence index has placed India in a strong position (India's index points 129 for the April – June quarter) and this should help the industry, particularly consumer durable industry, to perform well. The money supply has been well contained within the projected level and at the same time, by and large, adequate liquidity has been maintained in the economy. Base rate system, replacing BPLR introduced with effect from July 1, has more or less stabilised indicating effective transmission of the Reserve Bank's measure in the credit market.
RBI steps to curb inflation
However, the concern of the Reserve Bank to contain inflation continues and the measures announced in the present review are well aimed at bringing down the inflation to around 5.5 per cent. But, unfortunately, inflation control in the economy is dependent on several factors which inter-alia include the inflows of foreign exchange on which the Reserve Bank has only limited control.
The quantitative easing in advanced economies has of late been unpredictable and the interest rate scenario in international market has reached its lowest ebb forcing investors to look for greener pastures in developing economies and India is a better destination due to its political and economic stability.
The flow is more on account of international economic scenario and unless and until the advanced economies recover and their interest rates tend to be attractive, the inflows will continue to be there.
Although the funds are welcome, the speculative nature of inflows can destabilise our system and needs to be tackled with some innovative measures.
The need to counter FIIs' dominance over the domestic capital market is the need of the hour and the present policy review has not come out with any measures to prevent undesirable inflows. Inflation being caused on account of such inflows in particular is somewhat difficult to contain as the normal approach of intervention in forex market and resorting to sterilisation measures have their own limitations and cost to the economy.
This dilemma of the Reserve Bank is a reality in the present scenario of domestic and international economic situation.
The financial position of the Government has improved considerably and this should give the Reserve Bank lots of comfort.
The fiscal deficit will be well within the budget estimate in the context of large spectrum auction realisation, improved tax revenues, significant inflows from disinvestment and reduced market borrowings.
Repo rates hike
The increase in repo and reverse repos rate by 25 basis points each will make the funds costlier i.e., only to check inflation growth but not to affect economic growth adversely.
The fact that the cash reserve ratio has not been touched will ensure continued availability of reasonable liquidity.
However, the deposit growth, which continues to lag behind, will have its own consequences on banks' funds position and needs to be tackled.
Deposit growth
The Reserve Bank's observation that the real rate of interest continues to be negative despite hike in deposit rates on account of high inflation and diversion of deposits seeking higher rate of return from alternative investments in gold, real estate, stock market etc. takes place needs to be seriously viewed and action initiated to arrest this trend.
The stake is very high for the economy as there is already a boom in real estate, gold and stock market prices. The abnormal increase in prices in these assets should not be construed to mean by any means the strength of the economy.
This has been adequately cautioned by the Reserve Bank and some measures in the housing loan segment have been proposed.
The prices should really reflect the fundamentals of the economy, purchasing power of the large segment of the population and the demand and supply of assets. The monetary policy of the Reserve Bank alone cannot be a panacea for the problems the economy faces.
Dr.T.V.gopalakrishnan
(This appeared in Business Line dt 8/11/10)
Friday, November 12, 2010
Tuesday, November 2, 2010
Failure of regulation
This refers to your edit Banks should not be forced to lend to MFIs (ET dt 30/10/10). Micro Finance Institutions are in the news for the past few days for all wrong reasons. The MFIs emerged on the model of Grameena Banks in Bangla Desh as a panacea to remove the poverty levels among the poor in agricultural and rural sector through provision of small loans without requiring collaterals, have of late been a cause of concern for the authorities. They were allowed to grow and function without much of regulatory and supervisory controls and they had grown very fast exploiting the weaknesses in the credit delivery system particularly under rural segment.
The failure of banking system to make financial inclusion a reality and the inclusion of loans by banks to MFIs as a priority sector advances became very handy for MFIs to lay strong foundation in rural areas. In the garb of an institution and with the indirect encouragements they received as Non Banking Financial Companies they took the role of informal money lenders and could entice the poor with their initial concessions and incentives. Some of the new generation banks in particular found it convenient to expand their exposure to agriculture and village industries through MFIs and for the latter the funds they got from banks became a source to spread their business only to exploit the poor. The crux of the issue is financial exclusion and failure of authorities to come out with proper regulation and supervision of MFIs at appropriate time. As rightly pointed out in your edit, the solution to control MFIs is to make the financial inclusion compulsory with the aid of technology, mobile phones and UID.
Dr T.V.Gopalakrishnan
( An edited version of this appeared in Economic Times Dt 2/11/10)
The failure of banking system to make financial inclusion a reality and the inclusion of loans by banks to MFIs as a priority sector advances became very handy for MFIs to lay strong foundation in rural areas. In the garb of an institution and with the indirect encouragements they received as Non Banking Financial Companies they took the role of informal money lenders and could entice the poor with their initial concessions and incentives. Some of the new generation banks in particular found it convenient to expand their exposure to agriculture and village industries through MFIs and for the latter the funds they got from banks became a source to spread their business only to exploit the poor. The crux of the issue is financial exclusion and failure of authorities to come out with proper regulation and supervision of MFIs at appropriate time. As rightly pointed out in your edit, the solution to control MFIs is to make the financial inclusion compulsory with the aid of technology, mobile phones and UID.
Dr T.V.Gopalakrishnan
( An edited version of this appeared in Economic Times Dt 2/11/10)
Sunday, October 24, 2010
Banks put up good show during the global financial crisis
Banks in India put up good show during the global financial crisis:
The performance of various bank groups as on March 2009 and March 2010 had been impressive despite constraints faced by them due to slow down in the economy because of global financial crisis and adverse real economic scenario witnessed all over the whole world. A few selected parameters indicating Bank Group-wise Performance as at end March 2009 & 2010 is furnished below.
(Fig in per centage)
Bank Groups Cost of fund Return on adva Return on Net NPAs
adj to cost assets
of funds
2009 2010 2009 2010 2009 2010 2009 2010
SBI & Subsidiaries 5.94 5.32 3.95 3.60 1.02 0.91 1.47 1.50
Nationalised Banks 6.09 5.35 4.09 3.83 1.03 1.00 0.68 0.91
Old Private Sector Bks 6.67 6.13 5.15 4.81 1.15 0.95 0.90 0.83
New Private Sector Bks 6.06 4.43 5.23 5.13 1.12 1.38 1.40 1.09
Foreign Banks 4.46 2.82 8.14 7.17 1.99 1.26 1.81 1.82
All Sch.Commercial Bks 5.96 5.09 4.53 4.19 1.13 1.05 1.05 1.12
Source: Reserve Bank of India- A profile of banks 2009-10.
Performance Parameters during the two year period showed that banking sector exhibited its remarkable resilience in withstanding the impact of global economic crisis. Increase in Net NPAs or fall in return on assets during the period was marginal whereas the cost of funds registered a significant decline. Analysis of bank group-wise performance was as follows.
Cost of funds:
The cost of funds had come down considerably during the year 2009-10 although it continued to be high for all bank groups except for foreign banks. While the cost of funds which ranged between 4.46 per cent and 6.67 per cent for different bank groups in March 2009 came down considerably and worked out between 2.82 per cent and 6.13 per cent in March 2010. Foreign banks could bring down their cost of funds from 4.46per cent to 2.82 per cent during the period, whereas the state bank group and nationalized banks could bring down their cost only from 5.94 per cent to 5.32 per cent and 6.09 per cent to 5.35 per cent respectively. While the new private sector banks could bring down their cost of funds sharply by 1.63 per cent, the old private sector banks could bring down their cost of funds only by 0.54 per cent during the period. Cost of funds for public sector banks and old private sector banks continued to remain high and is a matter of concern. The reasons perhaps for their high cost of funds could be due to high overhead costs because of comparatively low penetration of computerization, information technology, high wages of their human resources as they are comparatively in the higher age profile and relatively higher rate of interest offered on deposits and high cost of deposits. The cost of funds in general and interest rate on advances in particular have to be necessarily brought down to remain competitive in business and improve the credit portfolio.
Return on advances adjusted to cost of funds:
Return on advances adjusted to cost of funds in respect of various bank groups remained in the range of 3.95 per cent and 8.14 per cent as at end Mach 2009 and 3.60 per cent and 7.17 per cent as at end March 2010. Among various bank groups State Bank Group had the lowest return on advances for both the years March 2009 and March 2010. Foreign banks outperformed the entire bank groups as their return on advances adjusted to cost of funds stood at 8.14 per cent and 7.17 per cent as at end March 2009 and 2010 respectively. The new private sector banks also did well as compared to all other bank groups with 5.23 per cent and 5.13 per cent during the two years. Sustenance of this sort of return will be a major task for all bank groups in a dynamic financial market.
Return on assets:
In respect of return on assets, while the foreign bank group scored well as compared to the other bank groups, state bank group stood lowest even compared with old private sector banks. It is noteworthy to observe that while the new private sector banks increased their return on assets from 1.12 per cent in March 2009 to 1.38 per cent in March 2010, all other bank groups including foreign banks registered a decline on their return on assets during the period.
Net NPAs:
Barring state bank group, nationalized banks, and foreign banks, the other bank groups could show a reduction in their Net NPAs during the period 2009 -10. The benefit of restructuring of assets might have come to the rescue of banks to improve their NPAs position.
Analyses of different parameters indicate that foreign banks displayed comparatively a better show and there is scope for public sector banks and old private sector banks to better their performance. The economy is doing well except perhaps on inflationary front and the time augurs well for the banks to widen their business further taking advantage of the gaps in the area of financial inclusion, infrastructure funding and financing of agriculture and related industries.
T.V.Gopalakrishnan
(This appeared in Business Line dt25/10/10
The performance of various bank groups as on March 2009 and March 2010 had been impressive despite constraints faced by them due to slow down in the economy because of global financial crisis and adverse real economic scenario witnessed all over the whole world. A few selected parameters indicating Bank Group-wise Performance as at end March 2009 & 2010 is furnished below.
(Fig in per centage)
Bank Groups Cost of fund Return on adva Return on Net NPAs
adj to cost assets
of funds
2009 2010 2009 2010 2009 2010 2009 2010
SBI & Subsidiaries 5.94 5.32 3.95 3.60 1.02 0.91 1.47 1.50
Nationalised Banks 6.09 5.35 4.09 3.83 1.03 1.00 0.68 0.91
Old Private Sector Bks 6.67 6.13 5.15 4.81 1.15 0.95 0.90 0.83
New Private Sector Bks 6.06 4.43 5.23 5.13 1.12 1.38 1.40 1.09
Foreign Banks 4.46 2.82 8.14 7.17 1.99 1.26 1.81 1.82
All Sch.Commercial Bks 5.96 5.09 4.53 4.19 1.13 1.05 1.05 1.12
Source: Reserve Bank of India- A profile of banks 2009-10.
Performance Parameters during the two year period showed that banking sector exhibited its remarkable resilience in withstanding the impact of global economic crisis. Increase in Net NPAs or fall in return on assets during the period was marginal whereas the cost of funds registered a significant decline. Analysis of bank group-wise performance was as follows.
Cost of funds:
The cost of funds had come down considerably during the year 2009-10 although it continued to be high for all bank groups except for foreign banks. While the cost of funds which ranged between 4.46 per cent and 6.67 per cent for different bank groups in March 2009 came down considerably and worked out between 2.82 per cent and 6.13 per cent in March 2010. Foreign banks could bring down their cost of funds from 4.46per cent to 2.82 per cent during the period, whereas the state bank group and nationalized banks could bring down their cost only from 5.94 per cent to 5.32 per cent and 6.09 per cent to 5.35 per cent respectively. While the new private sector banks could bring down their cost of funds sharply by 1.63 per cent, the old private sector banks could bring down their cost of funds only by 0.54 per cent during the period. Cost of funds for public sector banks and old private sector banks continued to remain high and is a matter of concern. The reasons perhaps for their high cost of funds could be due to high overhead costs because of comparatively low penetration of computerization, information technology, high wages of their human resources as they are comparatively in the higher age profile and relatively higher rate of interest offered on deposits and high cost of deposits. The cost of funds in general and interest rate on advances in particular have to be necessarily brought down to remain competitive in business and improve the credit portfolio.
Return on advances adjusted to cost of funds:
Return on advances adjusted to cost of funds in respect of various bank groups remained in the range of 3.95 per cent and 8.14 per cent as at end Mach 2009 and 3.60 per cent and 7.17 per cent as at end March 2010. Among various bank groups State Bank Group had the lowest return on advances for both the years March 2009 and March 2010. Foreign banks outperformed the entire bank groups as their return on advances adjusted to cost of funds stood at 8.14 per cent and 7.17 per cent as at end March 2009 and 2010 respectively. The new private sector banks also did well as compared to all other bank groups with 5.23 per cent and 5.13 per cent during the two years. Sustenance of this sort of return will be a major task for all bank groups in a dynamic financial market.
Return on assets:
In respect of return on assets, while the foreign bank group scored well as compared to the other bank groups, state bank group stood lowest even compared with old private sector banks. It is noteworthy to observe that while the new private sector banks increased their return on assets from 1.12 per cent in March 2009 to 1.38 per cent in March 2010, all other bank groups including foreign banks registered a decline on their return on assets during the period.
Net NPAs:
Barring state bank group, nationalized banks, and foreign banks, the other bank groups could show a reduction in their Net NPAs during the period 2009 -10. The benefit of restructuring of assets might have come to the rescue of banks to improve their NPAs position.
Analyses of different parameters indicate that foreign banks displayed comparatively a better show and there is scope for public sector banks and old private sector banks to better their performance. The economy is doing well except perhaps on inflationary front and the time augurs well for the banks to widen their business further taking advantage of the gaps in the area of financial inclusion, infrastructure funding and financing of agriculture and related industries.
T.V.Gopalakrishnan
(This appeared in Business Line dt25/10/10
Monday, October 4, 2010
Bank Deposits and Risk Perception of Depositors
Bank deposits and risk perception of depositors
As banks have risk assessment for deploying their resources, depositors have their own perception of risk about banks for depositing their savings and to that extent the financial literacy can be considered to be very high and the awareness about market risk is appreciable. This is evident from the position of deposits of various bank groups in India during the period 2008- 2010 ie the beginning of crisis during the crisis and afterwards. The global financial crisis which triggered in September 2008 in US market and subsequently spread all over the world has impacted the Indian banking in several ways although it remained insulated from the severe jolt experienced by its counterparts particularly in advanced countries. The bank group wise figures illustrates that the confidence level of public in private sector banks including foreign banks has witnessed a set back and it has increased considerably in public sector banks during the crisis period. Depositors seem to have perceived more risk in depositing their money with private sector banks and shifted their loyalty to public sector banks as revealed by the figures.
Public confidence in banks depends basically on ownership, sound regulatory and supervisory system in force and insurance coverage for their deposits. They also worry about the inflation risk and they have their calculation on real interest and hedge against this risk. As the insurance coverage for deposits is limited to only Rs 1 lakh per depositor irrespective of the bank (whether private or public) in which the deposit is made, the preference of public for safety of their entire deposits with public sector banks is understandable and is fully justifiable during a crisis period like the one the world experienced since September 2008. Although the Indian banks are well run and financially sound because of efficient and effective regulatory and supervisory mechanism, the preference for public sector by depositors is apparent and well exhibited as revealed by various parameters. For instance, the share of public sector banks in total deposits which stood at 73.91 percent before the crisis ie as at end March 2008, increased to77.61percent as at end March 2009 ie during the crisis and further to 77.68 percent as at end March 2010 after recovery began. The following table will indicate share of deposits to total deposits and rate of growth of deposits in different bank Groups during 2008-10.
Bank groups 2007-08 2008-09 2009-10
Share of deposits to Total deposits Rate of growth of deposits Share of deposits to Total deposits Rate of growth of deposits Share of deposits to Total deposits Rate of growth of deposits
Public Sector Banks 73.91% 23.05% 76.61% 26.85% 77.68% 18.60%
Old Private Sector Banks 4.99% 19.78% 4.90% 20.34% 4.84% 15.37%
New Private Banks 15.34% 23.13% 13.22% 5.43% 12.48% 10.39%
Foreign Banks 5.76% 26.81% 5.27% 11.99% 5.00% 11.11%
The rate of growth of deposits in general has registered a sharp decline in all bank groups as at end March 2010 as compare to that of end march 2008 perhaps evidencing increased awareness among public to hedge against inflation. While the inflation rate has been on the increase for the past couple of years, the rate of interest has fallen leaving no incentive to save money with the banks. High inflation adversely affects the capacity and propensity to save. In the absence of any real rate of interest, the public seem to have opted to spend more, save less and invest available surplus in alternative assets or instruments such as gold, real estate and other instruments of savings which fetch offer better return than banks. The increase in real estate, commodity prices (particularly gold and silver) and sensex which has recently crossed 20K is a clear indication that public awareness about investment market has gone up and their risk perception, risk assessment and risk management have improved well .
While the share of old private sector banks and foreign banks in total deposits showed a marginal decline during the period 2008 -10, the share of new private sector banks declined considerably from 15.34 percent in 2008 to 12.48 percent in 2010. The rate of fall in deposit during the crisis year ie 2009 is significant in new private sector and foreign banks as compared to other bank groups.
While the investors awareness about market risks and alternative avenues of investments is welcome, the risks they carry on speculative investments in gold and real estates are something of very high order. The markets and the economy also carry heavy risk from this sort of build- up of assets in the long run and need to be taken care of.
Dr.T.V.Gopalakrishnan
(This appeared in Business Line dt4/10/2010)
As banks have risk assessment for deploying their resources, depositors have their own perception of risk about banks for depositing their savings and to that extent the financial literacy can be considered to be very high and the awareness about market risk is appreciable. This is evident from the position of deposits of various bank groups in India during the period 2008- 2010 ie the beginning of crisis during the crisis and afterwards. The global financial crisis which triggered in September 2008 in US market and subsequently spread all over the world has impacted the Indian banking in several ways although it remained insulated from the severe jolt experienced by its counterparts particularly in advanced countries. The bank group wise figures illustrates that the confidence level of public in private sector banks including foreign banks has witnessed a set back and it has increased considerably in public sector banks during the crisis period. Depositors seem to have perceived more risk in depositing their money with private sector banks and shifted their loyalty to public sector banks as revealed by the figures.
Public confidence in banks depends basically on ownership, sound regulatory and supervisory system in force and insurance coverage for their deposits. They also worry about the inflation risk and they have their calculation on real interest and hedge against this risk. As the insurance coverage for deposits is limited to only Rs 1 lakh per depositor irrespective of the bank (whether private or public) in which the deposit is made, the preference of public for safety of their entire deposits with public sector banks is understandable and is fully justifiable during a crisis period like the one the world experienced since September 2008. Although the Indian banks are well run and financially sound because of efficient and effective regulatory and supervisory mechanism, the preference for public sector by depositors is apparent and well exhibited as revealed by various parameters. For instance, the share of public sector banks in total deposits which stood at 73.91 percent before the crisis ie as at end March 2008, increased to77.61percent as at end March 2009 ie during the crisis and further to 77.68 percent as at end March 2010 after recovery began. The following table will indicate share of deposits to total deposits and rate of growth of deposits in different bank Groups during 2008-10.
Bank groups 2007-08 2008-09 2009-10
Share of deposits to Total deposits Rate of growth of deposits Share of deposits to Total deposits Rate of growth of deposits Share of deposits to Total deposits Rate of growth of deposits
Public Sector Banks 73.91% 23.05% 76.61% 26.85% 77.68% 18.60%
Old Private Sector Banks 4.99% 19.78% 4.90% 20.34% 4.84% 15.37%
New Private Banks 15.34% 23.13% 13.22% 5.43% 12.48% 10.39%
Foreign Banks 5.76% 26.81% 5.27% 11.99% 5.00% 11.11%
The rate of growth of deposits in general has registered a sharp decline in all bank groups as at end March 2010 as compare to that of end march 2008 perhaps evidencing increased awareness among public to hedge against inflation. While the inflation rate has been on the increase for the past couple of years, the rate of interest has fallen leaving no incentive to save money with the banks. High inflation adversely affects the capacity and propensity to save. In the absence of any real rate of interest, the public seem to have opted to spend more, save less and invest available surplus in alternative assets or instruments such as gold, real estate and other instruments of savings which fetch offer better return than banks. The increase in real estate, commodity prices (particularly gold and silver) and sensex which has recently crossed 20K is a clear indication that public awareness about investment market has gone up and their risk perception, risk assessment and risk management have improved well .
While the share of old private sector banks and foreign banks in total deposits showed a marginal decline during the period 2008 -10, the share of new private sector banks declined considerably from 15.34 percent in 2008 to 12.48 percent in 2010. The rate of fall in deposit during the crisis year ie 2009 is significant in new private sector and foreign banks as compared to other bank groups.
While the investors awareness about market risks and alternative avenues of investments is welcome, the risks they carry on speculative investments in gold and real estates are something of very high order. The markets and the economy also carry heavy risk from this sort of build- up of assets in the long run and need to be taken care of.
Dr.T.V.Gopalakrishnan
(This appeared in Business Line dt4/10/2010)
Wednesday, September 29, 2010
sensex,Real Economy and the reality
Sensex, Real economy, and the reality
This refers to your edit 'The Sensex Rides again' (ET,dt 22nd Sep,2010). The sensex has again crossed 20 K mark after a gap of 32 months and the market men are happy. Even the Finance minister has expressed his happiness by saying that after 2008 January, for the first time it has crossed 20,000. No doubt, it signifies the improvement in the confidence level among investors both from domestic and international market over the fact that the economy is performing well and will continue to perform better in future also. But, how far, this confidence is sustainable and manageable is an issue well analysed in your edit.
The rise in index is basically on account of increased flow of funds from international markets seeking better return. The investment climate in both the US and European markets is not very conducive both in terms risk and return and the investors have found better avenues to divert funds to Indian market which is safe and offer higher rate of return. From Foreign institutional investors angle, it is fine, but to what extent our economy can absorb these funds without being hurt is what needs to be examined when the index goes up and up. The real economy is not that bright as on today with low productivity in agriculture, high unemployment, high inflation, inadequate infrastructure,high level of poverty etc etc to boast of a high sensex index which in any case cannot be a yard stick to measure the real strengh of a developing economy.
The inflows of short term funds seeking quick returns purely on a speculative basis although essential perhaps to provide liquidity and strength for capital formation and capital market, bring with them the problem of exchange rate and interest rate management which have a bearing on exports, imports, inflation, current account deficit etc.This has to be kept in mind while assessing the benefits of rise in sensex. Capital market is germane to a large segment of population is a fact in India and cannot be ignored . In fact an index indicating how much of the population is part of the capital market would be a better yard stick to assess the strength of the real economy.
Dr.T.V.Gopalakrishnan
This refers to your edit 'The Sensex Rides again' (ET,dt 22nd Sep,2010). The sensex has again crossed 20 K mark after a gap of 32 months and the market men are happy. Even the Finance minister has expressed his happiness by saying that after 2008 January, for the first time it has crossed 20,000. No doubt, it signifies the improvement in the confidence level among investors both from domestic and international market over the fact that the economy is performing well and will continue to perform better in future also. But, how far, this confidence is sustainable and manageable is an issue well analysed in your edit.
The rise in index is basically on account of increased flow of funds from international markets seeking better return. The investment climate in both the US and European markets is not very conducive both in terms risk and return and the investors have found better avenues to divert funds to Indian market which is safe and offer higher rate of return. From Foreign institutional investors angle, it is fine, but to what extent our economy can absorb these funds without being hurt is what needs to be examined when the index goes up and up. The real economy is not that bright as on today with low productivity in agriculture, high unemployment, high inflation, inadequate infrastructure,high level of poverty etc etc to boast of a high sensex index which in any case cannot be a yard stick to measure the real strengh of a developing economy.
The inflows of short term funds seeking quick returns purely on a speculative basis although essential perhaps to provide liquidity and strength for capital formation and capital market, bring with them the problem of exchange rate and interest rate management which have a bearing on exports, imports, inflation, current account deficit etc.This has to be kept in mind while assessing the benefits of rise in sensex. Capital market is germane to a large segment of population is a fact in India and cannot be ignored . In fact an index indicating how much of the population is part of the capital market would be a better yard stick to assess the strength of the real economy.
Dr.T.V.Gopalakrishnan
Sunday, August 29, 2010
Banks, Deposits and Inflation
Banks, Deposits and inflation
The rate of growth of deposits of scheduled commercial banks has been on the decline for the past couple of years and concerns have been expressed on declining trend in deposits.
The reasons for the fall in deposit growth rate can be broadly attributed to unabated inflation , impact of the global financial crisis , lower GDP growth compared to the past trend , regulatory measures such as CRR, SLR , availability of alternate avenues of investment offering comparatively better returns than bank deposits and continued preference of people to have cash transactions. The deposit figures for the past few years are given below.
Deposit (Rs Crores)
2007-2008 31,96,939
2008-2009 38,34,110 (19.9%)
2009-2010 44,86,574p(17.0%)
P: provisional
The rate of growth of deposits is said to have further declined to around 15 % on a year on year basis as of 2nd July 30, 2010.
Source: RBI Bulletin –May 2010
The high level of inflation had entered into double digits in last February bringing down the real rate of interest and taking away depositors’ / Savers’ interest to save money with banks.
INTEREST ON DEPOSITS
Paradoxically, while the rate of inflation has gone up, the rate of interest on deposits has come down. The banks offer only 3.5 percent on savings deposits and between 6.5 percent and a maximum of 9 percent (for senior citizens) on long term deposits.
The Propensity to spend rather than to save money is very much visible among people. When inflation continues unabated, solution remains elusive and evasive, and with a vast majority of people struggling to make both ends meet, the savings will fall and banks’ deposits decline. Those who can afford to save even under high inflationary conditions will think of alternatives to protect their hard earned savings from erosion of value.
High inflation may perhaps be one of the reasons for increased demand for some of the consumer items as money spent today is more worth than to preserve and spend later.
PRESERVE VALUE OF WEALTH
Beside when other avenues of saving which offer a better return and hedge to fight inflation and preserve the value of wealth are available, the depositor- preference to bank deposits disappears.
Like banks people also have their own way of Asset – Liability Management and switch over to mutual funds, post office savings deposits, corporate deposits, real estate, capital market, gold and other commodities.
This reflects in a way improved financial literacy and better awareness of the availability of different markets and products. This should be a welcome signal from the angle of healthy competition and wider market to improve the financial system, although it has affected adversely the deposit growth of commercial banks.
CRR HIKES
The periodical increase in CRR though very essential as a monetary management tool to contain money supply and withdrawal of interest on the CRR balances ( payable over and above the 3 % minimum)have also been a cause for declining trend in deposits.
This, coupled with the minimum prescribed Investments under SLR and advances to preferred sectors which do not fetch attractive returns may be discouraging banks to mobilize deposits aggressively.
The general reluctance of banks to reduce their NIM from the present level of 3 and 3.5 percent because of various reasons also forces banks to offer lower rate of interest to depositors. Increasing non performing loans and additional provisional requirements towards bad debts compel banks to reduce expenditures mainly interest payment.
FINANCIAL INCLUSION
The concern expressed over declining deposits is justified and needs to be addressed. Financial inclusion (not only of the poor but also the well to do) is an immediate solution. Even in banked centres the exclusion is perhaps equal to inclusion, if not more.
Apart from rural and semi-urban centres, even in urban and metropolitan areas money lenders, chit fund and blade companies continue to thrive and survive well. Banks need to penetrate further to capture business and the opportunity should not be missed.
The easiest way to bring maximum people under the banking fold is to have a policy to ensure that all transactions above a cut off limit say Rs 5000 should only be by means of cheque and debit card. All real estate and gold related transactions above a cut off limit should be compulsorily routed through banks.
INFO-TECH
With the help of Information Technology, this measure can be easily complied with by proper tie-ups with concerned institutions. Minimum the cash transactions in the society the better for banks, public and all authorities. Fine tuning of all operations and increasing the turn over should help the banks to lower its NIM and offer better rate of interest to depositors.
(This article appeared in "The Hindu- Business Line" on 9th August 2010).
Dr.T.V.Gopalakrishnan
The rate of growth of deposits of scheduled commercial banks has been on the decline for the past couple of years and concerns have been expressed on declining trend in deposits.
The reasons for the fall in deposit growth rate can be broadly attributed to unabated inflation , impact of the global financial crisis , lower GDP growth compared to the past trend , regulatory measures such as CRR, SLR , availability of alternate avenues of investment offering comparatively better returns than bank deposits and continued preference of people to have cash transactions. The deposit figures for the past few years are given below.
Deposit (Rs Crores)
2007-2008 31,96,939
2008-2009 38,34,110 (19.9%)
2009-2010 44,86,574p(17.0%)
P: provisional
The rate of growth of deposits is said to have further declined to around 15 % on a year on year basis as of 2nd July 30, 2010.
Source: RBI Bulletin –May 2010
The high level of inflation had entered into double digits in last February bringing down the real rate of interest and taking away depositors’ / Savers’ interest to save money with banks.
INTEREST ON DEPOSITS
Paradoxically, while the rate of inflation has gone up, the rate of interest on deposits has come down. The banks offer only 3.5 percent on savings deposits and between 6.5 percent and a maximum of 9 percent (for senior citizens) on long term deposits.
The Propensity to spend rather than to save money is very much visible among people. When inflation continues unabated, solution remains elusive and evasive, and with a vast majority of people struggling to make both ends meet, the savings will fall and banks’ deposits decline. Those who can afford to save even under high inflationary conditions will think of alternatives to protect their hard earned savings from erosion of value.
High inflation may perhaps be one of the reasons for increased demand for some of the consumer items as money spent today is more worth than to preserve and spend later.
PRESERVE VALUE OF WEALTH
Beside when other avenues of saving which offer a better return and hedge to fight inflation and preserve the value of wealth are available, the depositor- preference to bank deposits disappears.
Like banks people also have their own way of Asset – Liability Management and switch over to mutual funds, post office savings deposits, corporate deposits, real estate, capital market, gold and other commodities.
This reflects in a way improved financial literacy and better awareness of the availability of different markets and products. This should be a welcome signal from the angle of healthy competition and wider market to improve the financial system, although it has affected adversely the deposit growth of commercial banks.
CRR HIKES
The periodical increase in CRR though very essential as a monetary management tool to contain money supply and withdrawal of interest on the CRR balances ( payable over and above the 3 % minimum)have also been a cause for declining trend in deposits.
This, coupled with the minimum prescribed Investments under SLR and advances to preferred sectors which do not fetch attractive returns may be discouraging banks to mobilize deposits aggressively.
The general reluctance of banks to reduce their NIM from the present level of 3 and 3.5 percent because of various reasons also forces banks to offer lower rate of interest to depositors. Increasing non performing loans and additional provisional requirements towards bad debts compel banks to reduce expenditures mainly interest payment.
FINANCIAL INCLUSION
The concern expressed over declining deposits is justified and needs to be addressed. Financial inclusion (not only of the poor but also the well to do) is an immediate solution. Even in banked centres the exclusion is perhaps equal to inclusion, if not more.
Apart from rural and semi-urban centres, even in urban and metropolitan areas money lenders, chit fund and blade companies continue to thrive and survive well. Banks need to penetrate further to capture business and the opportunity should not be missed.
The easiest way to bring maximum people under the banking fold is to have a policy to ensure that all transactions above a cut off limit say Rs 5000 should only be by means of cheque and debit card. All real estate and gold related transactions above a cut off limit should be compulsorily routed through banks.
INFO-TECH
With the help of Information Technology, this measure can be easily complied with by proper tie-ups with concerned institutions. Minimum the cash transactions in the society the better for banks, public and all authorities. Fine tuning of all operations and increasing the turn over should help the banks to lower its NIM and offer better rate of interest to depositors.
(This article appeared in "The Hindu- Business Line" on 9th August 2010).
Dr.T.V.Gopalakrishnan
Monday, July 26, 2010
Banking innovatively to build infrastructure
Investments in infrastructure in the eleventh five year plan are estimated at Rs 2.056,150 crores ($ 514 billion) and the avenues to raise them are limited.
According to the Planning Commission Report on projections of Investment in Infrastructure (August 2008) it is estimated that only 30 percent of the infrastructure needs can be met directly from the budget.
While 40 percent of the requirements are expected to be met from internal generation and market borrowings, the remaining 30 percent have to come from private investment and this depends upon the creation of a supportive investor friendly environment and the ability to roll out bankable projects.
Finding these resources is the challenge faced by the economy to achieve 9 to 10 percent growth in GDP by 2012.
This calls for an innovative approach to policies. Efforts are on to mobilize funds by offering tax incentives. The Government has allowed some institutions like Life Insurance Corporation of India, Industrial Finance Corporation of India, Infrastructure Development Finance Corporation and some non banking finance companies authorized by the Reserve Bank as infrastructure Companies to issue tax free Infrastructure Bonds to raise funds. Can these institutions raise the required funds ?
Time has come for banks to restructure their balance sheets and find ways and means to support infrastructure development in a big way. Although banks have been in infrastructure financing, the tendency to avoid long term funding of infrastructure projects citing short term nature of resources and consequent asset- liability mismatch has been there since late 1990s with the introduction of asset liability and risk management concepts. Minimization of cost and maximization of profit without locking up of funds in long term ventures has been the philosophy pursued and the reforms in regulation and supervisory areas also are well suited to follow this line of approach. No doubt it has paid huge dividends and our banking system has proved to be sound and safe. But can this approach go on?
The Financial Institutions catering to long term needs of industries also found the circumstances conducive to convert themselves as banks and we have ICICI and IDBI banks in the place of ICICI and IDBI which were prominently and successfully engaged in financing huge long term projects for decades. Only institution which remained and continues to function as an All India Financial Institution is only the Industrial Finance Corporation of India Ltd. Some institutions like Infrastructure Development Finance Corporation, Infrastructure Leasing and Finance Ltd , etc, have since been developed but they are not adequate enough to meet the ever growing demands of infrastructural developments in tune with the international standards and requirements of the economy slated to register double digit growth.
Reliable Source
Banking System is the best and reliable source for infrastructure funds. With branches spread all over the country and abroad and with knowledge of the people and markets banks can easily mobilize the resources.
However, there is need for policy, regulatory support and incentives without in any way compromising on banks’ safety and soundness.
The banks should be allowed to mobilize funds for a minimum period of five years and a maximum period of ten years and these funds have to be shown under the nomenclature “Deposit for infrastructure development”.
The funds should be exempt from CRR / SLR and their investments should be allowed comparatively to carry a lower risk weight for capital adequacy.
Though the exemption from CRR will have an adverse impact to contain particularly the defying inflation but the benefits that can accrue to the economy in terms of GDP growth and economy’s international reputation and image with improved physical infrastructure. The interest earned on these deposits up to Rs 20,000 can be considered for tax exemption . The rate of interest can be more or less equal to that of post office savings interest for Fixed Deposits with tax benefits.
To Counter Asset- Liability mismatch, the approach has to be something different as far as these funds are concerned. Since the maturity pattern is definite i.e. only after five years and more, the deployment of funds will also be beyond five years and above. Mismatch may even then arise but with enough head room for adjustment.
Banks will have adequate time and opportunities to bridge the mismatch. The periodical cash flows from investments have to be recycled in such a way that they minimize the mismatch.
The take out finance which did not take off as envisaged needs to be revived to encourage infrastructure financing by banks and specialized institutions.
Securitization of infrastructural advances and development of secondary market for these papers will also go a long way in finding the liquidity for banks and minimizing the adverse impact of mismatch. It is for authorities to come out with the right environment.
Dr.T.V.Gopalakrishnan
Former Chief General Manager,
Reserve Bank of India
( views are Personal)
( This appeared in Business Line dt 26/07/10).
According to the Planning Commission Report on projections of Investment in Infrastructure (August 2008) it is estimated that only 30 percent of the infrastructure needs can be met directly from the budget.
While 40 percent of the requirements are expected to be met from internal generation and market borrowings, the remaining 30 percent have to come from private investment and this depends upon the creation of a supportive investor friendly environment and the ability to roll out bankable projects.
Finding these resources is the challenge faced by the economy to achieve 9 to 10 percent growth in GDP by 2012.
This calls for an innovative approach to policies. Efforts are on to mobilize funds by offering tax incentives. The Government has allowed some institutions like Life Insurance Corporation of India, Industrial Finance Corporation of India, Infrastructure Development Finance Corporation and some non banking finance companies authorized by the Reserve Bank as infrastructure Companies to issue tax free Infrastructure Bonds to raise funds. Can these institutions raise the required funds ?
Time has come for banks to restructure their balance sheets and find ways and means to support infrastructure development in a big way. Although banks have been in infrastructure financing, the tendency to avoid long term funding of infrastructure projects citing short term nature of resources and consequent asset- liability mismatch has been there since late 1990s with the introduction of asset liability and risk management concepts. Minimization of cost and maximization of profit without locking up of funds in long term ventures has been the philosophy pursued and the reforms in regulation and supervisory areas also are well suited to follow this line of approach. No doubt it has paid huge dividends and our banking system has proved to be sound and safe. But can this approach go on?
The Financial Institutions catering to long term needs of industries also found the circumstances conducive to convert themselves as banks and we have ICICI and IDBI banks in the place of ICICI and IDBI which were prominently and successfully engaged in financing huge long term projects for decades. Only institution which remained and continues to function as an All India Financial Institution is only the Industrial Finance Corporation of India Ltd. Some institutions like Infrastructure Development Finance Corporation, Infrastructure Leasing and Finance Ltd , etc, have since been developed but they are not adequate enough to meet the ever growing demands of infrastructural developments in tune with the international standards and requirements of the economy slated to register double digit growth.
Reliable Source
Banking System is the best and reliable source for infrastructure funds. With branches spread all over the country and abroad and with knowledge of the people and markets banks can easily mobilize the resources.
However, there is need for policy, regulatory support and incentives without in any way compromising on banks’ safety and soundness.
The banks should be allowed to mobilize funds for a minimum period of five years and a maximum period of ten years and these funds have to be shown under the nomenclature “Deposit for infrastructure development”.
The funds should be exempt from CRR / SLR and their investments should be allowed comparatively to carry a lower risk weight for capital adequacy.
Though the exemption from CRR will have an adverse impact to contain particularly the defying inflation but the benefits that can accrue to the economy in terms of GDP growth and economy’s international reputation and image with improved physical infrastructure. The interest earned on these deposits up to Rs 20,000 can be considered for tax exemption . The rate of interest can be more or less equal to that of post office savings interest for Fixed Deposits with tax benefits.
To Counter Asset- Liability mismatch, the approach has to be something different as far as these funds are concerned. Since the maturity pattern is definite i.e. only after five years and more, the deployment of funds will also be beyond five years and above. Mismatch may even then arise but with enough head room for adjustment.
Banks will have adequate time and opportunities to bridge the mismatch. The periodical cash flows from investments have to be recycled in such a way that they minimize the mismatch.
The take out finance which did not take off as envisaged needs to be revived to encourage infrastructure financing by banks and specialized institutions.
Securitization of infrastructural advances and development of secondary market for these papers will also go a long way in finding the liquidity for banks and minimizing the adverse impact of mismatch. It is for authorities to come out with the right environment.
Dr.T.V.Gopalakrishnan
Former Chief General Manager,
Reserve Bank of India
( views are Personal)
( This appeared in Business Line dt 26/07/10).
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