2019-08-11_Business_Today

keeping away from competing on

rates because of the higher interest

cost they will have to bear and lack

of avenues to deploy the deposits

profitably. “Credit drives deposit

growth as a fundamental concept

of monetary system,” says Ar-

vind Chari, Head-Fixed Income

& Alternatives, Quantum Advi-

sors, which caters to institutional,

HNIs and retail investors.

DOMESTIC SAVINGS

LEAKAGE

A credit squeeze in sectors like real

estate and construction has a spill-

over effect on the larger economy.

The recent Economic Survey has

pointed out that the fall in the

household savings is mainly due

to a decline in physical savings

(real estate, gold) by households,

and only a marginal decline in fi-

nancial savings.

The overall savings rate in the

economy has fallen from the lev-

els of 33 per cent-plus of GDP in

2012/13 to 30 per cent. The big-

gest reason for this is households’

savings rate falling from 23 per

cent to 17 per cent in the same pe-

riod (see: Household Savings).

The two other elements of

gross domestic savings – savings

of private and public sector com-

panies – are also not encouraging.

The corporate savings rate looks

better despite GST and other dis-

ruptions mostly due to the benefit

that consumption driven compa-

nies got from lower commodity

prices, says Nikhil Gupta, Chief

Economist, Motilal Oswal Finan-

cial Services.

There is not much hope from

PSU savings as the government

is asking PSUs to manage their

capital requirements by borrow-

ing directly from the market. Many

would have to dip into their savings to partly fund the

expenditures.

The net financial savings are also falling – 7.2 per

cent in 2011/12 to 6.6 per cent in 2017/18. The rise in

financial liabilities (loans, credit cards) of households is

shrinking financial savings.

In a scenario of falling household savings, low level

of financial savings, and a high level of government bor-

lem. These banks had continuous
losses, lower capital and growing
NPAs. For instance, a large bank
like Central Bank of India report-
ed de-growth of about 5 per cent
in its loan book in 2018/19. Many
weak banks shifted their lending
focus from infrastructure, steel
and textiles to agri, MSMEs and
retail (mostly unsecured). In the
past few months, half the weak
banks are back in the market to
restart lending as the government
has promised to pump in capital
but the lending activity is very se-
lective.
Banks themselves are facing as-
set liability management (ALM) is-
sues as most of the deposit resourc-
es are short-term in nature. “Apart
from credit risk (in long-term
projects), there is also an ALM risk
that the bank takes into account
before lending money,” says Krish-
nan Sitaraman, Senior Director at
CRISIL. In addition, weak balance
sheets restricted the ability of some
banks to raise resources through
certificates of deposit (CDs), an-
other source for banks to mobilise
resources from mutual funds and
other institutional investors. CD is-
suance showed a fall to 5.65 lakh crore from7.72 lakh crore five
years ago.
Bankers suggest that there
is a secular decline in the deposit
growth if one takes a longer pe-
riod. Deposit growth, despite the
presence of many new private
banks, has actually declined from
20-25 per cent levels in early
2000 to single digits (see: Fall In
Deposit Growth). “Deposit growth
has not kept pace with credit
growth,” admits Sitaraman. In-
vestors’ comfort with investing in
mutual funds, insurance and even
equity, is one of the reasons for
lower deposits, says Rakesh Kumar, Research Analyst-
Banking at Elara Capital. Higher interest rates means
postal savings are more attractive for rural and semi-
urban investors.
Current account deposits from companies has been
affected by high levels of stress – almost one-fifth of
these accounts are either NPA or classified as stressed.
Some weak banks are discouraging term deposits or

COVER STORY > LIQUIDITY

36 I BUSINESS TODAY I August 11 I 2019

ACTION

PLAN

What the government and

RBI are doing to ease the

credit squeeze

Finance Minister Nirmala

Sitharaman announced PSB

recapitalisation of up to

`70,000 crore in the Budget

The government will encour-

age PSBs to buy high-rated

pooled assets of up to ` 1 lakh

crore of financially sound

NBFCs, for which it will provide

a one-time six-month partial

credit guarantee for the first

loss of up to 10 per cent.

The government has decided

to shift a part of its borrowings

abroad, in foreign currencies,

so that financial institutions

get space to borrow more

money from the domestic

market

The RBI has been providing

liquidity support to banks

through its open market

operations and rupee-dollar

swap window

The RBI has been putting

pressure on banks to not

hamper the flow of credit

to the needy sectors