Attracting, retaining more stable retail deposits a necessity, says RBI
While Indian banks showed resilience during the financial crisis, there are areas which need attention, such as asset quality and liquidity management, the Reserve Bank of India (RBI) has said.
According to the Trend and Progress report released by RBI, gross non-performing assets (NPAs) of the system are rising, with an increase in the proportion of doubtful assets. “The signs of financial stress thus remain an important concern for the Indian banking sector in the medium to long term,” RBI said.
| MORE HEADACHE MOUNTING DOUBTFUL LOANS (Rs CR) | |||
| (in Rs crore) | Substandard assets | Doubtful assets | Loss assets |
| Public sector banks | 28,791 -20,603 | 25,383 -21,019 | 5,750 -4,296 |
| Private | 8,842 -10,592 | 6,590 -5,035 | 2,166 -1,345 |
| Foreign banks | 4,929 -5,874 | 1,440 -1,004 | 758 -416 |
| Total | 42,561 -37,069 | 33,412 -27,058 | 8,674 -6,056 |
| Figures as on end of March 2010 (brackets are for year ended March 2009) Source :RBI | |||
While gross NPAs in 2009-10 rose to 2.39 per cent from 2.25 per cent in the previous year, net NPAs increased to 1.12 per cent from 1.05 per cent. “Going ahead, management of NPAs remains a concern, as there is likelihood of deterioration in the quality of restructured loans,” said RBI.
RBI said the growth of NPAs largely followed a lagged cyclical pattern with regard to credit growth. Empirical analysis shows asset quality can get compromised during periods of high credit growth, leading to creation of NPAs in later years.
Foreign banks continued to have the highest gross NPA ratio at 4.29 per cent, followed by private banks (2.74 per cent) and public sector banks (2.19 per cent).
An interesting finding of the RBI study is that weaker sections — small and marginal farmers, scheduled castes and tribes — have shown a steady decline in the NPA ratio in the recent years. “This trend corroborates the point that the weaker sections are in fact not less creditworthy than other sections and strengthens the case for furthering the process of financial inclusion.”
The rise in NPAs was reflected in the 22.4 per cent increase in provisioning by banks in 2009-10. RBI said banks must maintain a 70 per cent provision coverage ratio.
Liquidity
RBI said liquidity management would become critical for banks as the monetary stance responded to macroeconomic development.
“Banks will have to put in place a robust liquidity management plan, especially through encouragement and retention of stable retail deposits,” RBI said.
The slowing in banks’ balance sheets in 2009-10 was mainly due to low deposit mobilisation. Bank deposits, 78 per cent of the total liabilities of scheduled commercial banks, registered a decline in growth for the third year since 2007-08.
“One of the factors responsible was low interest rates for a major part of the year,” RBI said. The composition of deposits had shown a significant change in 2009-10, as low-cost deposits, or the savings and current account deposits (Casa), increased from 33.2 per cent to 35.4 per cent. Casa accounted for almost half the incremental deposits in 2009-10. RBI said the calculation of interest rates on a daily product basis, with effect from April 1, would boost savings deposits.
“Going forward, it is important that banks focus on deposit mobilisation with commensurate interest rates that could boost retail deposits,” RBI said.
While the share of Casa increased, there was a decline in long-term deposits, that is, those with a maturity of more than three years.
“The asset-liability mismatch was noticeable for public sector banks, with a shift in their deposit liabilities towards the short-term end of the maturity spectrum, alongside a shift in their loans and investments towards the long end,” RBI said.
Private sector banks, however, exhibited a shift in favour of medium and long-term deposits, while loans moved towards the short term.
