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Banks: A balance sheet reshuffle - Views on News from Equitymaster
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  • Mar 23, 2005

    Banks: A balance sheet reshuffle

    GDP growth, industrial growth and money supply (M3) are the key factors having an influence on the dynamics of the banking sector. While both GDP and industrial growth move parallel to the sector's credit disbursement trend, money supply (or liquidity) has an inverse relation to it. This is due the fact that while a buoyant economy supports higher income levels and therefore better liquidity, credit necessity for individuals and companies alike, diminishes.

    In the last five years, both industrial (indicated as IIP) and credit growth have shown relatively lesser fluctuation as compared to the early 1990's.

    However, in 1HFY05, inflation touched a high of 8.2% and the resultant liquidity overhang caused monetary policies to be designed such that the excess liquidity is sucked out. Taming down of inflation caused bank credit growth to witness a rejuvenated spurt and the same created a liquidity crunch for the banking entities. Most 'bluechip banks' witnessed a scorching asset growth and struggled to maintain their minimum CAR requirements.

    What needs to be brought to one's notice is the fact that as the industrial growth in the country has seen a revival, the non-food credit has picked up pace in the first two quarters of FY05. Also it needs to be highlighted that 'non food credit' includes both the retail and corporate credit segments both of which are 'high revenue yielding' segments for the banks. Thus most banks have intentionally shifted majority of their credit allocation to the non-food segment to capitalise on the potential 'benefits', while the food credit allocation remains restricted to the 'priority sector credit' quota.

    Amplified credit disbursements necessitated banks to concentrate on incremental sourcing as well, to avoid asset - liability mismatches. However, it was necessary to see to it that this does not adversely impact the cost of funds and subsequently the NIM. With this in mind, banks focused on garnering higher quantum of low cost deposits (demand deposits) that could replace the high cost borrowings or time deposits.

    …as the interest rates move with an upward bias and credit growth remains vulnerable to inflation and economic growth, banks may witness several alterations in the contents of their balance sheets. Consolidation and foreign investment would only add to it. A matter of prudence would thus be to partially insulate the balance sheets from potential downsides by making requisite provisions and adopting the best risk appraisal practices. After all, it's the public money at stake! Are the banks listening?



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