If banks have to lend more, they must have resources
Speaking at the 75th AGM of IBA on September 16, Finance Minister Nirmala Sitharaman said that if India wishes to grow at a particular speed over the next 25 years, banks will have to play the role of a catalyst.
It is good that the importance of banks is recognised by the Finance Minister. But what is happening at the ground level is entirely different. The banks are made to bleed due to wrongful importance given to the borrowers at the cost of depositors who sacrifice their present consumption and enable banks to lend.
What is a catalyst? In chemistry, we call a catalyst a substance that increases the rate of a chemical reaction without itself undergoing any permanent chemical change. But banks’ borrowers extract everything from the banks and try to finish the ‘catalyst’. Initially, corporate borrowers want maximum finance from banks. They want it at concessional rates of interest too. Then they default and want the banks to reschedule the payment obligation. They want further credit by threatening that otherwise the previous loan cannot be recovered. Finally, they want waiver of interest, write off, one-time-settlement etc. This process goes on and on and to keep the banks viable, banks pass on this cost to the depositors by way of real negative interest.
Recently, the RBI released a handbook on statistics on the Indian Economy. This contains a table showing Weighted Average Domestic Term Deposit Rate and it pertains to the end of the respective financial year. For the years from 2014-15 to 2020-21, the following are the WADTD Rates respectively in percentages 8.57, 7.73, 6.97, 6.67, 6.89, 6.38 and 5.28. The following are the annual consumer inflation rate during the same period, again in percentages: 4.91, 4.95, 3.30, 3.94, 3.73, 6.62 and 5.13. When we adjust for inflation the real interest the depositors got for their Term Deposit will be as follows: 3.66, 2.78, 3.67, 2.73, 3.16, 0.76 and 0.15 per cent of returns. This is the fate of persons who keep their savings with banks as fixed deposits. For persons who are leaving their surplus in a Savings Account, the real return will be negative. If this trend is not corrected, a day will come that the retail depositors will desert banks and there may not be any role of finance intermediation by banks.
If banks have to lend more, they must have resources. As per Financial Stability Report of RBI released in June 30, 2022, after reaching a high of 11.9 per cent in March 2021, aggregate deposit growth (y-o-y) of Scheduled Commercial Banks moderated gradually through 2021-22 reaching 9.9 per cent in March 2022 and further to 9.1 per cent by June 3, 2022. This should be a warning signal for policy makers. By paying pittance, you cannot expect depositors to patronise banks forever.
Banks have to mandatorily maintain a Cash Reserve Ratio of 4.5 per cent and Statutory Liquidity Ratio of 18 per cent of their deposits. When CRR can be in the form of cash holding or balance the RBI, it does not earn any interest for banks. The SLR is maintained by investment in permitted government securities, which earns low yield for the banks. In other words this is government borrowing from bank deposits and this in turn reduces the lending capacity of banks to others.
Banks are again mandated to lend to priority sectors like agriculture, small scale industries, etc., for which they charge a concessional rate of interest. Banks are targeted to provide 40 per cent of their credit to the priority sector with various sub targets for agriculture, etc.
(The author is a retired banker)
