Banks experienced elevated liquidity risks during 2023 with RBI absorbing excess liquidity while keeping repo rates stable but elevated at 6.5 per cent since February 2023. The liquidity deficit in the banking system widened to a near eight-year-high of ₹2.58 trillion on December 21, 2023, prompting the central bank to conduct the second VRR in December.

Liquidity crunch was seen during most of 2023 with credit growth outpacing deposit growth. As of December 1, bank credit grew by 15.8 per cent to reach ₹152.51 trillion while bank deposits grew 12.7 per cent YoY to reach ₹197.54 trillion. Banks also had to depend on the certificate of deposits (CDs) and the use of MSF to manage the liquidity risks that pushed up costs further.

Adding to the cost implications of disequilibrium in resource flows/deployment, rising interest rates led to a further shift to deposits with higher yields by interest-sensitive customers. The share of term deposits bearing less than a 6 per cent interest rate came down from 85.7 per cent in March 2022 to 38.7 per cent in March 2023 and 16.7 per cent in September 2023.

Correspondingly, the share of term deposits bearing a 6-8 per cent interest rate went up from 12.5 per cent in March 2022 to 57.8 per cent and further to 78.6 per cent in September 2023, pushing up the cost of resources.

Term deposit mobilisation outpaced the accretion to current and savings deposits (CASA). In the milieu, the term deposits accounted for over 89 per cent of the incremental deposits during Q2 2022-23. As a result, the share of term deposits in total deposits rose to nearly 60 per cent in September 2023 from 57 per cent in March 2023 (55 per cent in March 2022). The growing burden of high costs of deposits will impinge upon revenue streams in 2024.

Way forward

Given the impending challenges, banks will have to map their plans for business growth, capital adequacy, and risk management strategies. The emerging business dynamics call for a recalibration of the business mix blending the right proportion of large credit with a focus on manufacturing, MSME, and farm sector along with non-core business keeping individual risk profiles in view.

SBI already outlined that “focus on the four ‘I’s — innovation, infrastructure, investment, and inclusivity will shape the priorities of the banking system”. Banks will have to be more sensitive towards identifying and managing risks of regulatory arbitrage inherent in non-banks while collaborating or sharing resource space.

Meanwhile, the RBI’s upward revision of the GDP outlook to 7 per cent for FY24 and 6.7 per cent in 2024-25, must be seen in the context of recessionary risks in 2024 due to higher food and energy prices persisting amid geopolitical tensions. Since RBI is determined to reach the target of 4 per cent CPI inflation, the rate cut may have to wait for a while during 2024.

According to RBI Bulletin (December 2023), global growth is projected to weaken to its lowest annual rate in 2024 since the global financial crisis other than the first year of the pandemic.

In a recent report, the IMF warned that India’s general government debt may exceed 100 per cent of GDP in the medium term. But the government clarified that government debt has declined from around 88 per cent in FY21 to approximately 81 per cent in 2022-23. It affirmed its commitment to achieving fiscal consolidation targets.

The writer is an Adjunct Professor at Institute of Insurance and Risk Management – IIRM. Views are personal

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