Despite the recent correction in the stock market, we find most stocks still trading at significantly higher valuations than their historical averages. However, this doesn’t apply to one large sector – private sector banks. Whilst one of the reasons could be the resurrection of public sector banks from their high non-performing assets in the decade running upto Covid, in turn eviscerating some of the scarcity premium built into valuations of their better run private sector peers, the banking sector’s recent challenges around liquidity from weak deposit growth translating to weak credit growth seem to weigh in on its discount to the rest of the market. Aditya Puri, the former founding CEO of India’s best performing bank over the past three decades talks about the challenges in this column for the Indian Express.
“In the last two years, banks have bought Rs 13 trillion of G-Secs against a deposit inflow of Rs 40 trillion, driven by the need to maintain liquidity coverage (LCR) and statutory liquidity ratios (SLR) as mandated by the RBI on a daily basis rather than weekly average. Banks maintain 115 per cent to avoid breach. Given the low supply of papers from manufacturing companies, which also qualify as assets for LCR, banks buy government bonds to meet LCR.
To maintain some cushion in LCR over the mandated levels, banks end up holding SLR securities of up to 26 per cent against the regulatory requirement of 18 per cent.
Banks are also required to maintain a cash reserve ratio (CRR) of 4 per cent of deposits. So, when one looks at the regulatory preemptions, they are close to 30 per cent of banks’ deposits — 26 per cent on account of LCR and 4 per cent for CRR — reducing the lendable resources for banks, leading to higher lending rates.
Under the proposed LCR guidelines for digital deposits, banks would have to invest even more in liquid assets to meet LCR, which is estimated to be about 2- 2.5 per cent of deposits.
But, do we need both LCR and SLR? Globally, only LCR exists. Most parts of the world include CRR, which earns no interest, as HQLA (High Quality Liquid Assets). The volatility of deposits calculation and consequent investment of HQLA assets needs to be examined on a bank-specific basis. Basel only recommends, we need to examine.”
Beyond the LCR and SLR regulatory costs, he goes on to share a few more areas including priority sector lending, cashflow based lending, risk based pricing, UPI pricing, etc where easing regulations can help the banking system support credit growth in the country, much required for long term economic growth.
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