Uday Kotak: Current Banking Model Faces Challenges
Deposit and Lending Rates: A Negative Spread
Seasoned banker Uday Kotak has raised concerns about the present banking business model. He points to the shrinking gap between deposit and lending rates as a significant issue. Top banks are reportedly raising one-year wholesale deposits at around 8%. When considering CRR, SLR, deposit insurance, and priority sector lending requirements, the actual deposit cost exceeds 9%, excluding operating expenses.
However, banks are offering home loans at an 8.5% floating rate. This means that banks are borrowing at 9% and lending at 8.5%, leading to a negative 0.5% spread. Kotak questions how banks will cover operational and credit costs if this tight deposit situation continues, suggesting it could threaten their business model.
Expected Liquidity Infusion by RBI
- Bond markets witnessed a sharp decline in yields, signaling an expectation of further liquidity infusion by RBI before its monetary policy committee meeting in early April.
- On Friday, the yield on the 10-year bond closed at 6.58%, down from 6.6% on Thursday.
- Between December and March, RBI injected approximately Rs 6.2 lakh crore of durable liquidity into the banking system through a CRR cut, forex swaps, and open market bond purchases.
- The liquidity shortfall, as indicated by bank borrowings, has decreased to around Rs 20,000 crore.
Most economists agree that proper rate cut transmission necessitates RBI maintaining liquidity in surplus by at least 0.5% to 1.5% of total bank deposits. Many banks have requested a more predictable framework, with some bond dealers anticipating RBI to shift towards a daily repo.
