More Stories

Informist, Friday, Jul 19, 2024

--Skewed credit-deposit may put fincl system liquidity at risk 

--Imperative that banks have prudent liquidity mgmt measures 

--Credit growth should not outpace deposit growth by miles 

--Households increasingly turning to other sources, not banks 

--Bks must keep in mind shift in deposit preference from CASA 

--Earnings of banks indicate sound financial system

--New, emerging tech has reshaped financial system 

--Banks, NBFCs well positioned on capital, asset quality 

--Banks, NBFCs well positioned on profitability 

--Issue of bad loans is well contained 

--Issue of bad loans well contained, need to maintain that 

--Banks must focus on improving credit underwriting standards 

--Interest rate risk inherent to business of banking 

--Incorrect valuation of liquid assets not desirable 

--To put in place draft on liquidity coverage ratio framework 

--Critical for banks to manage cybersecurity, IT risks 

--Rise in digital frauds a major cause of concern 

--Banks need to improve customer onboarding processes 

--Working with banks to support digital fraud monitoring 

--Emphasise banks' delinquency levels warrant vigil

--Overall financial sector is robust 

--Come across entities with high-handed recovery practices 

--Considerable improvement in governance, some outliers remain 

--Charging high interest for microfinance loans not in order

--Climate change poses growing threat to econ growth 

--Unfair microfinance loan practices to force relook at norms 

--Sustainability aspects focal point of entire credit system 

--Banking penetration has been quite wide 

--Private credit as preferred credit mode growing rapidly 

--Convergence between banks, NBFCs and tech to increase 

--India needs sound banks, not proliferation of banks 

--Action on NBFCs, banks have been taken in customer interest 

--Overall health of urban cooperative banks has improved 

--See crypto currency as big risk to financial stability

 

MUMBAI – Amid the persisting gap between credit and deposit growth of banks, Reserve Bank of India Governor Shaktikanta Das today cautioned that skewed credit-deposit growth could put financial system liquidity at risk, and that credit growth should not outpace deposit growth by miles.

 

Speaking at The Financial Express Modern BFSI Summit 2024, Das said it was imperative that banks have prudent liquidity management measures.

 

As per latest available RBI data, banks' loans were up around 14% on year as on Jun 28, against nearly 11% growth in deposit books.

 

The RBI has flagged a higher credit-deposit ratio in the banking system in multiple forums over the last few months. Last year, the central bank had flagged concerns about excessive growth in unsecured retail loans and over-reliance of non-banking finance companies on bank funding. The RBI later increased risk weights on unsecured consumer credit and bank credit to NBFCs to pre-empt the build-up of any potential risk in these segments.

 

"As I just mentioned, deposit mobilisation has been lagging credit growth for some time now. This may potentially expose the system to structural liquidity issues," Das said. "While there could be a debate regarding deposit funding loans, vis-a-vis loans funding deposits, the current regulatory concern stems from the fact that there could be structural changes happening, which banks and NBFCs and other lenders need to recognise and accordingly device their strategies."  

Das also said households were increasingly turning to sources other than banks to park their savings. Hence, banks must keep in mind the shift in deposit preference from current account, savings account deposits.

 

"With credit growth remaining strong, banks need to continuously focus on improving and refining their credit underwriting standards and pricing of risks," Das said.

 

He said that while interest rate risk was inherent to the business of banking, banks must remain cautious against incorrect valuation of financial assets.

 

"Hence, it is imperative that our banks put in place prudent liquidity management measures proactively. It has to be borne in mind that incorrect valuation of liquid assets can give a false sense of short term liquidity resiliency, which is not desirable," Das said.

 

The RBI, he said, was reviewing the liquidity coverage ratio framework to address the emerging issues.

 

"We will be putting in place a discussion paper or a draft circular and inviting your comments and comments of all stakeholders before taking a decision," Das said.

 

The recent earnings of banks indicate that the overall financial sector was sound and robust, he said. Banks and non-banking financial companies were well positioned on capital, asset quality and profitability parameters, he said.

 

"I think overall, the problem of bad loans will now be contained, but we have to remain there. That is why we keep on giving all those cautionary advice."

 

According to the RBI's Financial Stability Report for June, the gross non-performing asset ratio of scheduled commercial banks improved further to a 12-year low of 2.8% as on Mar 31.

 

"...basically, the current times are good times, we don't want the bad times to come back", Das said.  

Das said that amid the increasing technological footprint and rapid digitalisation, it was critical that due emphasis was put on managing cybersecurity and information technology risks.

 

The rise in digital frauds was another area of concern, as was the rapid increase in the use of mule bank accounts to perpetrate such frauds. "This exposes the banks not only to serious financial and operational risks but also to reputational risks," Das said. 

 

Therefore, banks need to strengthen their customer on-boarding and transaction monitoring systems to monitor unscrupulous activities, including suspicious and unusual transactions.

 

"The Reserve Bank is working with banks and law enforcement agencies to strengthen transaction-monitoring systems and ensure sharing of best practices for control of mule accounts and prevention of digital frauds," Das said.

 

On governance in the banking and the financial sector, he said that overall, there was considerable improvement in adherence to fair conduct guidelines in recent years. However, there were instances of regulatory entities resorting to high-handed recovery practices, framing non-transparent loan contracts with inadequate disclosures of important terms or non-disclosure of charges, and levying excessive interest rates especially on microfinance loans, he said.

 

"These are not system-wide issues but are essentially outlier cases," Das said.

 

He warned that "unfair or usurious" practices under microfinance loans would compel the RBI to take a re-look at the revised regulatory framework for microfinance loans issued in March 2022.

 

Das also said that climate change posed a growing threat to economic growth, and needed immediate and sustained action on all fronts, and that the RBI had initiated steps to address risks posed to the financial system.

 

"Recent extreme weather events globally and in India such as heatwaves, droughts, floods and wildfires are stark reminders that we have to take decisive actions," Das said.  End

 

Reported by Richard Fargose

Edited by Avishek Dutta

 

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

 

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

 

Informist Media Tel +91 (22) 6985-4000

Send comments to feedback@informistmedia.com

 

© Informist Media Pvt. Ltd. 2024. All rights reserved.