RBI asks banks to rework business plans to manage liquidity

11 Jun 2024 CW Team

Reserve Bank of India (RBI) governor Shaktikanta Das urged banks to reconsider their business plans due to the persistent gap between credit and deposit growth rates, posing challenges in managing liquidity, repricing, and rollover risks. Das stated in a statement, "The continuing disparity between credit and deposit growth rates necessitates a reassessment by the boards of banks to reevaluate their business strategies. It is imperative to maintain a prudent balance between assets and liabilities." He also cautioned non-banking finance companies (NBFCs) and microfinance firms against charging exorbitant rates on small-ticket loans, affirming that the regulator will monitor the growth in the unsecured loan book and associated risks. RBI data for the fortnight ended May 17, 2024, indicates a gap of 3.1 %age points (310 bps) between credit and deposit growth rates. Despite active efforts by banks to mobilise deposits for over a year, the gap has consistently ranged between 3.0 and 3.5 %age points. This assessment excludes the impact of HDFC?s merger with HDFC Bank, which widens the gap to 6.2 %age points (620 bps). This is the second time after April 2024 that the RBI has expressed concerns regarding the disparity in deposit and credit growth rates. The credit-deposit ratio (C/D ratio) of banks has hovered around 80% since September 2023, leading to resource pressures for funding credit demand while adhering to regulatory requirements like maintaining a Cash Reserve Ratio (CRR) of 4.5% and a Statutory Liquidity Ratio (SLR) of 18%. During a post-policy media interaction, Swaminathan J., deputy governor of the RBI, remarked, "We cannot prescribe an ideal C/D ratio universally as it varies based on the business model, bank type, and their own risk appetite framework." He further emphasised the potential liquidity risk, rollover risk, or repricing risk if the gap widens further. Regarding the interest rates charged by certain microfinance firms and NBFCs, Das criticised the high rates on small-value loans, describing them as usurious. He urged regulated entities to judiciously utilise their regulatory freedom to ensure fair and transparent pricing of products and services. The RBI continues to engage constructively with such financial entities to protect customer interests and ensure overall financial stability. Additionally, Das highlighted the need for these entities to disclose the different interest rates being charged. In November 2023, the RBI raised concerns about excessive growth in unsecured retail loans and the over-reliance of finance firms on bank funding. Recent data indicates some moderation in these loans and advances.The RBI increased risk weights on unsecured consumer credit and bank credit to NBFCs in November 2023 to preempt potential risks in these segments.

Reserve Bank of India (RBI) governor Shaktikanta Das urged banks to reconsider their business plans due to the persistent gap between credit and deposit growth rates, posing challenges in managing liquidity, repricing, and rollover risks. Das stated in a statement, The continuing disparity between credit and deposit growth rates necessitates a reassessment by the boards of banks to reevaluate their business strategies. It is imperative to maintain a prudent balance between assets and liabilities. He also cautioned non-banking finance companies (NBFCs) and microfinance firms against charging exorbitant rates on small-ticket loans, affirming that the regulator will monitor the growth in the unsecured loan book and associated risks. RBI data for the fortnight ended May 17, 2024, indicates a gap of 3.1 %age points (310 bps) between credit and deposit growth rates. Despite active efforts by banks to mobilise deposits for over a year, the gap has consistently ranged between 3.0 and 3.5 %age points. This assessment excludes the impact of HDFC?s merger with HDFC Bank, which widens the gap to 6.2 %age points (620 bps). This is the second time after April 2024 that the RBI has expressed concerns regarding the disparity in deposit and credit growth rates. The credit-deposit ratio (C/D ratio) of banks has hovered around 80% since September 2023, leading to resource pressures for funding credit demand while adhering to regulatory requirements like maintaining a Cash Reserve Ratio (CRR) of 4.5% and a Statutory Liquidity Ratio (SLR) of 18%. During a post-policy media interaction, Swaminathan J., deputy governor of the RBI, remarked, We cannot prescribe an ideal C/D ratio universally as it varies based on the business model, bank type, and their own risk appetite framework. He further emphasised the potential liquidity risk, rollover risk, or repricing risk if the gap widens further. Regarding the interest rates charged by certain microfinance firms and NBFCs, Das criticised the high rates on small-value loans, describing them as usurious. He urged regulated entities to judiciously utilise their regulatory freedom to ensure fair and transparent pricing of products and services. The RBI continues to engage constructively with such financial entities to protect customer interests and ensure overall financial stability. Additionally, Das highlighted the need for these entities to disclose the different interest rates being charged. In November 2023, the RBI raised concerns about excessive growth in unsecured retail loans and the over-reliance of finance firms on bank funding. Recent data indicates some moderation in these loans and advances.The RBI increased risk weights on unsecured consumer credit and bank credit to NBFCs in November 2023 to preempt potential risks in these segments.

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