The Hindu Business Line : Mobilising resources

A multi-pronged approach will be needed to meet the challenges of resource mobilisation by the banking system. A fast growing economy will need adequate bank credit to oil various sectors.

Much has been said and written about the scorching pace at which bank credit has been growing over the last two and a half years. From 2005 onwards credit growth has surpassed that of deposits in the banking system. The trend continues and is expected to accentuate. Excess SLR (Statutory Liquidity Ratio) holdings of the banking system are fast getting depleted.

With the economy slated to grow at around 9 per cent and perhaps at 10 per cent during the Eleventh Plan, the demand for bank credit is bound to shoot up. Against 40-50 per cent of GDP now , the total bank credit may exceed 100 per cent of GDP as the economy matures. The investment-GDP ratio is expected at around 35 per cent during the Eleventh Plan, in sync with the growth projections of 9-10 per cent. This investment rate will translate into huge capex plans of corporates.

There will, thus, be competing claims for bank credit from sectors as diverse as infrastructure, housing, consumer credit, and retail besides the normal and expanding demand from industry, trade and agriculture.

The deposit growth of the banking system, however, is unable to keep pace with the ever-expanding demand for credit. The household sector, which contributes almost 75 per cent of the gross domestic savings of the economy, remains the key source of deposits.

Savings

Of late, however, there are indications that the household savings, comprising financial savings and physical assets, are moving away from bank deposits to more sophisticated forms of financial assets such as mutual funds, stocks and derivatives, or life insurance and pension contributions. There is also increased appetite for physical savings mainly in the form of housing and gold.

The challenge for the policy-makers and banks is two fold. One, there is a lurking fear that sectors such as infrastructure, commercial real-estate, large industry, consumer credit will draw away a chunk of the bank credit and with resources getting scarce, such sectors as SME (Small and Medium Enterprises) and agriculture, which have traditionally depended on bank credit, may not get their share from the banking system.

Two, with more and more bank credit going for infrastructure lending, commercial real-estate financing, and housing finance while the liability structure of the banks is getting shorter and shorter, banks may face serious asset-liability mismatch in the absence of sound Asset Liability Management practices. This problem is compounded by the fact that both on the assets and liabilities sides there are rigidities in the absence of tradable asset and liability instruments.

Resource crunch

On the resources front, banks face severe constraints. Savings of the private corporate sector are increasingly being used to finance investment programmes and overseas acquisitions. Government borrowing programmes too are apace involving a draft on bank resources. The days of traditional vanilla-type bank deposits seem numbered with the shift in depositors' preferences and technological innovations. Current and savings bank accounts, traditionally maintained for transaction purposes by the corporate sector and individuals respectively, appear to be dying products with the advent of such technologies as electronic funds transfer, and RTGS (real time gross settlement).

In such a scenario, a viable strategy may be financial inclusion. In India where even today about 40 per cent of the population is outside the purview of the formal system, bringing this uncovered segment into the banking fold will help monetise significant savings and provide stable resources to the banking sector. This will also help develop savings habit among the masses, thereby improving the country's savings rate.

Gold accumulation plan

Banks will also have to think of newer forms of resource mobilisation. One scheme could be a gold accumulation plan under which an individual deposits certain portion of his savings regularly with banks which undertake to return this saving in the form of cash or gold. Such a plan will satiate the needs of the depositors to have certain quantum of gold for a future date, without locking their savings in the form of physical metal that does not earn any return.

In turn, banks will have to cover their positions in the gold futures market. Banks may also have to devise long-term deposits in the nature of pension schemes. As an alternative to current and savings bank accounts, banks may need to think of money market mutual fund or liquid fund schemes under which checking accounts can be provided and funds invested in liquid assets and made repayable on demand.

To meet the growing needs of the infrastructure sector, banks may have to devise fixed/floating rate, long-term/perpetual bonds. The interest rate risk on such bonds can be covered through interest rate swaps or similar devices. In short, innovation will be the name of the game in the banking business.

Regulatory system

On the regulatory front, the Reserve Bank of India needs to move to its goal of reducing the CRR (cash reserve ratio) to 3 per cent thereby releasing resources to the banking system. The CRR has been long recognised as a blunt instrument of monetary policy. It is also recognised as an implicit tax on the banking system. Moreover, with the cause of excess money elsewhere (forex inflow in the form of foreign institutional investments), it would be unreasonable to penalise the banking system for it.

The SLR was never intended to be an instrument of monetary policy. Rather, it was a device for raising cheap funds for the government. Now, with the market for government securities getting diversified, there is no reason for the banking system to be burdened with a high SLR of 25 per cent. The pressure on the government debt market can be relieved by further easing the limits on foreign ownership of public debt and retailing of the government securities market.

Asset portfolio

To provide greater flexibility to the banks' asset portfolio, new avenues need to be explored. An active securitisation market for banks' assets will ease the pressure on bank liquidity. Factors hindering the development of the securitisation market include limits on market participation and high stamp duties. Asset Reconstruction Companies (ARCs) have been set up to recover the NPAs (non-performing assets) of the banking system and foreign special institution funds have begun investing in India's distressed debt. However, much more needs to be done in this area, particularly in improving the functioning of the ARCs.

(The author is a General Manager of a public sector bank. The views are personal.)