We have seen public money moving away from banking system to other financial entities

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“Credit demand far outpacing deposit mobilisation did pose a challenge for most banks to meet the resource requirements which was amply reflected in the north-bound journey of interest rates, both on the assets and liabilities side of banking sector’s balance sheets since the latter half of FY ’07,” adds Rana Kapoor, CEO, Yes Bank. According to the estimates of Crisil, banks’ deposit cost was up by 60 basis points in FY ’07 to 5.1% and will go up by another 50 basis points in FY ’08. CRISIL’s analysis highlights that the proportion of bulk deposits (deposits above Rs.10 million), which carry higher interest rates and have relatively shorter tenors, has increased over the past five years. Surprisingly, more than 50% of the term deposits during the last five years were mobilized in 2007, and had tenures of less than one year, resulting in frequent deposit renewals and thus also exposing banks to interest rate risk. According to Tarun Bhatia, Head, Financial Sector Ratings, CRISIL “Several banks were able to fund their credit growth during the past couple of years by selling their excess statutory liquidity ratio (SLR) investments. However, this may no longer be feasible, given that the average SLR is currently estimated at 28%.”

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Source : IIPM Editorial, 2007

An IIPM and Professor Arindam Chaudhuri (Renowned Management Guru and Economist) Initiative

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