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Concepts & Tutorials

Banks Took 35% of All New Deposits And Gave It To The Government

You put a deposit in a bank, and the bank has to invest some of it (21.5%) in government bonds. They can lend the rest to people like you and me.

Except they haven’t.

Even though the government has been paying sub-9% (and now, sub 8%) for borrowing, while you and I pay upwards of 12%, banks have been happy to park much more than required with the government. This is obvious in RBI data, which shows that in the last one year, of all the new money collected, 35% of that has been placed in government bonds!

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Effectively, while the RBI is clamouring for banks to cut rates and lend more, banks are keeping lending rates steady and instead, lending more and more money to the government instead.

Banks aren’t lending because they are afraid of more NPAs. That much is obvious now. But is the situation so bad that you will lend to the government at lower and lower yields? Sure, banks saw some profits (because yields fell and prices of bonds went up) but at this point, yields can start to move up, as the US is seeing lately with talks of rate hikes later this year. Then, what comes to the banks rescue? They have to go back to traditional lending, or they will die.

This is the sign of a horrible banking system. We need more banks to provide competition to lending. And we need some of these current banks to improve or fail, the status quo is undesirable. The system is far more stressed than it seems.

Note: You see the dip in that ratio just before this point? That’s the data on 3 April. Banks seem to have had a major effort to look good on their balance sheets, which basically means they lent more (probably evergreened loans) and took on higher deposits just to shore up their numbers. All revealed bank numbers – in their results etc. – are a snapshot as of the last day of the quarter (that is, March 31). Investors would do well to ask banks what their “daily average” deposits and credit numbers were for the month of March, rather than one number on the last day.

  • esotericBlue says:

    with govt. not bailing out sbi, sbi going to the markets to shore up capital, my mind wanders to the thought that not all psu banks have the clout/pull of sbi. without the govt.’s blank cheque, wonder if any psu bank[s] might go under?

  • Shash says:

    And this is the crux of why growth will not come back. And any green shoots are just that, transistors! Good luck to the Indian and world economy.

  • kumar says:

    i am not sure if we need more banks. perhaps what we need is better assessors of loan risk.
    it is not that everything you do in your life is going to come up roses, some things will fail miserably, some things will succeed beyond your expectations.
    it is unfortunate that banks are being put in a position of a venture capitalist, without the required underlying skill set. do they really have the vertical sector expertise in the industries they are being asked to lend to?
    when given multiple routes, banks [given the current punishment they are facing] will choose the safest route. and that is lending it back to the government.
    until government start going under. now, is that possible?
    this is my opinion, i could be wrong.

  • adithya says:

    is it possible the preference for more “risk free” govt bonds is driven by pressure from RBI / investors on banks to sort out their NPA?
    in other words if you cant increase the numerator, increase the denominator with risk free so that NPA% falls?

  • I suppose banks are using these Govt. bonds as collateral to borrow from RBI, which will be lent to corporate & retail segment. So they are not losing out there with SLR. But they are making noise with CRR as they do not earn any returns on that.

  • Robert says:

    “And we need some of these current banks to improve or fail” –>
    Improve bank improve means reduced NPA, lower operating costs, customized products, better margins.
    Reducing NPA translates to more pumping of funds into those sick companies –> Too risky, unlikely
    Lower operating costs –> Possible, but not overnight, this is negligible factor
    Customized new products –> Considering the competence of leadership and the sales force of PSBs not possible. Pvt sector banks can do this better. This can be a game changer but requires effort by banks. When there are good economic opportunities(after land bill etc) if banks are ready with good products for the new opportunities, they can pump in money in the right areas.
    Better margins –> Not possible, For too long Indian banks have enjoyed very good margins, they have to be willing to take a cut.
    I think more banks, increasing competition approach won’t help unless the newer banks come with right competence across the board, levels with good risk management practice and better product portfolio
    FAIL for the high NPA banks is very much needed. Those who have put bad assets on their books better shut down fast. Sooner the better for everyone except the unions. Better for PSBs if they coordinate and sacrifice one Big fat bank like Lehman brothers