If there is demand for credit, banks are ready to lend: Ashutosh Khajuria


The ED & CFO, Federal Bank, says savers need to be encouraged and given a reasonable return on their deposits.


The commentary all this time has simply been that there is no real liquidity issue, there is enough liquidity in the system. We have seen a tepid response to the first two round of cuts by the RBI and the question has always been whether there has been transmission by the banks. The Governor said banks have improved their transmission but the risk aversion still remains. Do you think there is going to be enough of a demand for credit and is risk aversion a real concern for banks as well?


Almost 90 per cent of the balance sheet of Indian banks on the liability side is from public deposits. Within that even if you take about 35-40 per cent of CASA, the remaining part is term deposits and these are also called fixed deposits. What this means is that you are committed to pay a fixed rate of interest to your depositors. Basically, the entire loan and advances portfolio is being funded by the public deposits.

Any bank, even if it is capitalised, CRAR is around 14-15 per cent of the risk-weighted assets if you just see the net worth part. If you just see the capital reserves part, it would be hardly 10% of the total liabilities. There is very little borrowing because Indian banks are not that much dependent on market borrowing to fund their assets, they are dependent on public deposits.

There has been a period, as long as a decade, where the savings bank rate of interest has not changed at all. So, when you see the liability structure of Indian banks, the transmission was a problem. Monetary transmission happens where the dependence is more on market funds. Market funds could be your CDs, interbank borrowings, it could be borrowings from Reserve Bank of India and all those things which are linked to the market rates.

Market rates change immediately when the repo rate has changed or policy rate has changed. On the asset side effective 1st of October 2019, retail assets and your MSME loans have been lent to external benchmark and most banks have linked it to repo rate rather than Treasury bill. Initially, some banks had linked their retail home loans etc. to Treasury bill but Treasury bill was more erratic. Of late, majority of the banks are linking their assets to policy rates. On the liability side, if you have savings bank linked to repo rate and on the asset side if you have the retail loans and newly acquired MSME loans linked to repo rate, it balances your ALMNO.

So, the question is not that banks are averse to risk, first they have to take care of their ALM requirement. Secondly, they have to see what is the structure of their liabilities. I cannot pay a lower rate of interest to my depositor where I committed a fixed rate of interest. So, if maturity value for a particular deposit is say Rs 100,000, it has to be 100,000 on maturity. I cannot say that repo rate has been cut by so many bps and therefore I am paying lesser to my fixed depositor, that is not possible. Earlier, transmission used to happen but it used to happen with a huge lag. Now it has and even the governor said that there is a better transmission. Why? Because there is linking with repo rates on both sides now. On risk aversion I would say there has to be a demand for credit, if there is a demand for credit, the banks are ready to lend.

Savings rate has seen another significant drop after the announcements by the RBI and that is important for all those who have their money in FDs or in savings account. They need to know that there is going to be a loss of income from savings rates.

Whenever we talk of policy rates and monetary transmission, probably, we just focus on how the assets are priced and how much pass-through is happening whether it is in a falling rate of interest or their rising rate of interest; how much banks have raised and all that. Focus is always on the asset side but my point is it should be more on the saver side.

Savers need to be encouraged, they need to be given a reasonable return on their deposits. Savers are an intermediary. From where else would we have the funds to provide it to the users? They are to be taken care of and banks are very cautious when they look at cutting the deposit rates and all. I do not say that simply because 40 bps has been cut on the policy, we will straightaway be cutting 40 bps on savings bank or on fixed deposit. It is because bank deposits compete with savings instruments and other financial instruments. We have to look at what are the NSSO instruments — Kisan Vikas, NSEs, PPF and various other instruments which are there in the market.

We also have to see what type of returns mutual funds and liquid funds are offering. Because we are competing, we do not straightway go by whatever is the policy signal. An equal amount of cut on deposit side and the advances side does not happen. ALCOs would be sitting, their meetings would be happening, there would be an analysis of the data and one has to see how much we can pass through and to that extent, we have to cut on the deposit side.

The lockdown is like a pause button on all economic activities. It is difficult to assess what comes next. What has been the response to the phase one of the moratorium? Also do you see a larger number of people and borrowers opting for the moratorium extension and what would be its impact?

It varies from bank to bank. There have been some banks who announce their results in the early part of the quarter or rather first half. By that time, the number of people opting for moratorium probably would not have grown to that extent because it was announced in the last week of March. You have a range of about 8-9 per cent by value of the loan book to something like 60-65 per cent as in the case of Bandhan Bank. They said it is about 60-65 per cnt of the borrowers who have opted for the moratorium.

If you take the median for larger private sector banks and results of public sector banks, that are yet to come in, the number comes to be closer to about between 30-40 per cent . One-third of the loan book could have been under moratorium if you just take the median as on date because we are towards the end of May and there is a fairly good understanding of or rather realisation of what type of borrowers have gone in for moratorium. There are some who have, if offered, opted out of as they said ultimately the interest burden would be on us so we would pay.





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