Small Finance Banks Seek Relief Amid High Credit-Deposit Ratios

October 7, 2024, 4:12 pm
Small finance banks (SFBs) are knocking on the Reserve Bank of India's (RBI) door. They are asking for a break. The reason? Their credit-deposit (CD) ratios have soared past 90%. This is a significant figure. It indicates that these banks are lending more than they are taking in deposits. In fact, some SFBs, like Suryoday, have CD ratios as high as 110%. This situation raises alarms about liquidity and financial stability.

The CD ratio is a critical measure. It compares total loans to total deposits. A high ratio can signal trouble. It suggests that a bank may not have enough liquidity to handle sudden withdrawals. This is a tightrope walk for SFBs. They need to lend to grow, but they also need to ensure they can meet withdrawal demands.

The RBI's current methodology for calculating the CD ratio does not account for borrowings from refinance institutions. These include NABARD, SIDBI, and NHB. This oversight is a thorn in the side of SFBs. They argue that if these borrowings were included, their CD ratios would look much healthier. A senior banker pointed out that refinancing is a stable source of funds. It should be treated similarly to deposits.

The implications are significant. High CD ratios can drag down profitability. They can also hinder growth. SFBs are essential players in the financial ecosystem. They cater to underserved segments of the population. If they are constrained by regulatory norms, it could stifle their ability to serve these communities.

The RBI has acknowledged the issue. In a recent press conference, the Deputy Governor hinted at the need for banks to reassess their strategies. The gap between deposit growth and loan growth is widening. This is a red flag. The RBI is urging banks to take a closer look at their business plans. The onus is on individual banks to adapt.

Meanwhile, SFBs are also managing their asset-liability profiles. They rely on long-term refinancing options. These funds come with lower interest rates and no cash reserve ratio requirements. This is a lifeline for SFBs. It allows them to match the tenor of their assets with their liabilities. However, the deposit market does not offer similar options. This mismatch creates challenges.

The situation is further complicated by the competitive landscape. Larger banks typically have CD ratios in the 80-90% range. They have more leeway. SFBs, on the other hand, are in a tight spot. They need to balance growth with risk management. The pressure is mounting.

The RBI's silence on the matter is telling. It raises questions about the future of SFBs. Will they receive the relief they seek? Or will they be left to navigate these choppy waters alone? The stakes are high. The financial health of these institutions is crucial for the broader economy.

In another corner of the banking sector, Regional Rural Banks (RRBs) in the Northeast are experiencing a turnaround. The Ministry of Finance has reported improvements since regular reviews began in 2022. These banks are vital for the rural economy. They provide essential services to farmers and small businesses.

The Finance Minister recently highlighted the progress made by RRBs. Their financial performance has improved significantly. In FY 2024, RRBs reported a net profit of ₹205 crore, a stark contrast to the loss of ₹11 crore in FY 2023. This turnaround is a beacon of hope. It shows that with the right support, these banks can thrive.

The Gross Non-Performing Assets (GNPA) ratio has also improved. It dropped from 15.6% in FY 2022 to 7.3% in FY 2024. This is a significant achievement. It indicates better asset quality and risk management.

The Finance Minister has urged RRBs to enhance credit disbursement. They should focus on government schemes like PM MUDRA Yojana and PM Vishwakarma Yojana. The emphasis is on agriculture and allied sectors. This is where the potential lies. Horticulture, sericulture, and animal husbandry are ripe for investment.

Moreover, the Finance Minister has called for collaboration with NABARD to promote Farmer Producer Organizations (FPOs). This initiative could empower farmers. It could help them access better markets and prices for their produce.

Financial inclusion is another priority. The Finance Minister has directed officials to ensure that every eligible person in the Northeast is covered under the Pradhan Mantri Jan Dhan Yojana. This is a crucial step. It aims to bring more people into the formal banking system.

The RRBs are also encouraged to develop customized MSME products. They should leverage local connections to increase their reach. This localized approach can yield dividends. It can help RRBs penetrate underserved areas.

In conclusion, the banking landscape in India is evolving. Small finance banks are grappling with high CD ratios. They seek regulatory relief to maintain liquidity and growth. Meanwhile, Regional Rural Banks in the Northeast are on the upswing. They are improving their financial health and expanding their reach. The future of banking in India hinges on how these institutions adapt to challenges and seize opportunities. The road ahead is fraught with challenges, but it is also filled with potential.