Financial Daily from THE HINDU group of publications
Friday, Apr 29, 2005
Money & Banking - Insight
Banks asked to refocus on deposit mobilisation
THE Reserve Bank of India (RBI) has released its Annual Monetary and Credit Policy Statement for 2005-06. It is on expected lines except for the hike in the reverse repo rate. Would it result in higher deposit and lending rates? Not likely. At the moment, the reverse repo transactions under the Liquidity Adjustment Facility amount to around Rs 30,000 crore against Rs 80,000 crore a year earlier. It is a measure of the surplus liquidity in the system engendered by the inflow of forex. The year-on-year credit to the non-food commercial sector rose 26.5 per cent in contrast to 18.4 per cent the previous year.
The incremental non-food credit-deposit ratio has been 100.7 per cent. This situation could easily be met by the banks liquidating the excess SLR investments, which came down from 41.3 per cent of net demand and time liabilities in March 2004 to 38.5 per cent a year later, in addition to deposits freshly mobilised. The statutory minimum is 25 per cent only. Still, it has not been adequate to absorb all the funds that have flown in. Hence, the massive reverse repo transactions.
In view of the interest rate risk to investments, banks have preferred to invest in short-term investments of Treasury Bill. There is an arbitrage element. According to a report, the 91-day Treasury Bill has an yield, which is 100 basis points over that of a deposit of similar maturity. It is increasingly becoming necessary to raise the underwriting fees to see through the floatation of long-term securities. In such a situation, if credit demand picks up, the banking system can easily liquidate its surplus investments in SLR securities and earn a much higher return from lending than what they can from the RBI through the RR route.
If there is no reason for raising the lending rate, there is none for doing it for deposits either. Only when the entire surplus liquidity is eliminated, the banks may approach the central banker as a lender of the last resort. It is at that time that the Bank rate and repo rate the rates at which the RBI lends will have an effect and, then, the real quest for deposits through a hike in interest rates will start. This is going to take some time.
The macroeconomic story projects the image of an economy, which is buoyant with no serious inflationary problem as of now. However, it cautions the country against the dangers ahead, especially on oil front.
From the weighted contribution of factors to inflation, it is found that the share of the fuel group climbed to 37.8 per cent during the year from 11.6 per cent in 2003-04. The share of the manufactured products group fell to 51.1 per cent from 80.5 per cent in 2003-04 as the increase in sugar prices was more than offset by the decline in the prices of cotton, edible oils and oil cakes. The share of the primary articles group during the year was marginally higher than that in the previous year.
Thus, one cannot lay all the blame on the inflation front on oil alone. By raising the reverse repo rate and saying that the low point in the interest rate cycle has been passed, the RBI has issued a timely warning to the system to be prepared for further tightening.
Banks have been advised to refocus on their deposit mobilisation efforts in the light of the deceleration in its increase. Deposit growth takes place because of fiscal deficit financed by the central bank, inflow of foreign funds or a rise in the value of the deposit/money multiplier, ceteris paribus. The first two avenues have been closed by the central bank's market operations. The third factor is a medium- to long-term phenomenon, depending on the banking habits and the public's preference for currency.
The money mobilised by small-savings schemes, provident funds, and so on, go into the government kitty directly and banks do not benefit except for some float, if there is any.
All the other avenues for investment such as mutual funds do not take away deposits from the banking system. They return to them because those agencies have their bank accounts. Some adjustments are made by the RBI in deposits/money supply for the merger of ICICI and ICICI Bank, on the one hand, and IDBI and IDBI Bank, on the other. Are they really necessary? The RBI needs to take another look at the compilation and find out the real reasons for deceleration of deposit growth. But, more important, should not the central bank be happy with the decline in deposit growth in a situation of excess liquidity?
The RBI should be congratulated for some innovations. It released the economic review for the previous year a day in advance of the announcement of Credit Policy. This gave enough time for everyone to understand the background to the policies. It is similar to the Economic Survey being published ahead of the Budget. One significant announcement was that there would be quarterly reviews, besides the mid-term one of the economy. This is only a revival of a practice initiated in the early 1990s when the Reserve Bank of India Bulletin was revamped. Instead of the verbose monthly financial review, which was appearing till then, analytical write-ups on quarterly developments were published. Unfortunately, this practice, approved by the then RBI Governor, was discontinued through sheer apathy or by default.
(The author is a former officer-in-charge of the Department of Economic Analysis and Policy, RBI.)
Stories in this Section
The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription
Group Sites: The Hindu | Business Line | The Sportstar | Frontline | The Hindu eBooks | The Hindu Images | Home |
Copyright © 2005, The
Hindu Business Line. Republication or redissemination of the contents of
this screen are expressly prohibited without the written consent of
The Hindu Business Line