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Time of India
3 days ago
- Business
- Time of India
Further repo rate cut is imminent on June 8, 2025
Dr Rao is currently teaching risk management in the institute of Insurance and Risk Management (IIRM). A career banker with Bank of Baroda, he held the position of General Manager - Strategic Planning, Later was Associate Professor with National Institute of Bank Management (NIBM) and was Director, National Institute of Banking Studies and Corporate Management (NIBSCOM). He writes for financial dailies on Banking and Finance and his work can be viewed in the public academic accomplishments include Ph.d in commerce from Banaras Hindu University (BHU), MBA ( Finance), LLB. He runs a Youtube channel - Bank on Me - Knowledge series He likes to share his perspectives with next generation potential leaders of the banking industry. His book on "Transformation of Public Sector Banks in India' was published in september 2019. His most interesting work is in blog. LESS ... MORE In the backdrop of the economy's multidimensional resilience growing at 6.5 percent in FY25, in line with RBI expectations, and inflation expected to stay below the 4 percent mark, there is general buoyancy in markets. This is despite tense geopolitical risks, ongoing border unrest, and the US changing the tariff gears, arbitrarily increasing uncertainty. GDP growth is supported by corresponding GVA growth during FY25 at 6.4 percent, though it dropped from 8.6 percent in FY24 in sync with the then-GDP. Among the important drivers of monetary policy, the inflation and growth trajectories are key factors influencing the policy actions. The annual inflation rate fell to 3.16 percent in April 2025, down from 3.34 percent recorded in March 2025. April inflation is firmly below the market expectations of 3.3 percent. RBI at its bi-monthly policy meeting in April, projected CPI-based inflation for the current fiscal FY26 at 4 per cent, assuming a normal monsoon. Notably, inflation in the April–June quarter (Q1) is expected to dip as low as 3.6 per cent, revised sharply down from an earlier estimate of 4.5 per cent. Food prices, which account for nearly half of the consumer price basket, rose only 1.78 percent, the least since October 2021, and down from 2.69 percent in March. Even WPI averaged 2.3 percent, subscribing to the receding trend. Prospects of the economy: The agriculture sector is expected to rebound to a growth of 3.8 per cent in FY25. The industrial sector is estimated to grow by 6.2 per cent in FY25. Strong growth rates in construction activities and electricity, gas, water supply, and other utility services are expected to support industrial expansion. On a yearly basis services sector grew by 7.2 per cent in FY25 as against 9.0 per cent in FY24. The manufacturing sector has always been a cause of concern. Its HSBC India Manufacturing PMI was down to 57.6 in May 2025 from 58.2 in April. Service sector PMI clocks 58.2 in April, a notch lower than 58.5 recorded in March 2025. RBI projections of GDP for FY26 are 6.5 percent, and inflation is expected to be 4 percent. IMF expects GDP to grow at 6.2 percent while the World Bank expects India to grow at 6.3 percent in is more optimistic about the GDP of India growing at 6.4 percent in FY26. According to the IMF, India is still known to be the fastest-growing large economy, which is now the 4th largest economy, surpassing Japan and a notch below Germany. External Sector: In an interconnected financial system, it is necessary to understand the linkages of the domestic economy with the rest of the world. RBI has been cutting rates since February 2025, while the US Federal Reserve has held the federal funds rate steady in a range of 4.25 percent to 4.50 percent in the last 3 FOMC meetings since December 2024, after lowering it by one percent. The last mile disinflation journey was tough, and US inflation reached 2.1 percent in April 2025, close to its target of two percent. UK inflation shot back to 3.5 percent in April 2025, up from 2.6 percent in March 2025. It may prompt the Bank of England to keep the rates steady until the inflation drops. ECB too began rate cuts in June 2024 and has been giving priority to price stability. Its inflation is at 2.2 percent in April against a target of 2 percent. On 17th April 2025, it had cut rates by 25 basis points, which was effective from 23 April 2025. Way forward: Notably, the GDP of 6.5 percent in FY25 is below 9.2 percent in FY24 and 7.6 percent in FY23. Since the upside risks to inflation cannot be ruled out due to the sensitivity of food inflation, a close to 50 percent weightage in the basket. Balancing growth–inflation dynamics will need a lot of forward data and market intelligence inputs to find a common ground. But given the potentiality of the economy to be unleashed, thrust on growth and balancing it well with inflation will call for a further rate cut in the upcoming monetary policy review. Having already cut the repo rate by 50 basis points by bringing it down to 6 percent, going by the macroeconomic developments, another 25-basis-point repo rate cut is imminent. There are, of course, bullish views that the RBI may be aggressive in going for a 50-basis-point rate cut, which may not look realistic. The external sector dynamics amid tariff tussle and geopolitical risks could pose unanticipated risks. RBI has changed the stance of monetary policy in April to 'accommodative' and is providing adequate liquidity from time to time to ensure efficient and quick transmission of policy rates. It has injected Rs. 6.6 lakh crore into the system by using tools like open market operations (OMO), variable rate repo (VRR) auctions, and dollar-rupee swaps to inject liquidity in the banking system. Despite adequate liquidity, bank credit growth moderated to 11.2 percent in April 2025, a decrease from the 15.3 percent growth seen in the same period the previous year. This slowdown was observed across various sectors, including retail loans, personal loans, and industry credit. However, certain sectors like loans against jewelry and renewable energy experienced substantial growth. The latest RBI guidelines on Gold Loans should be able to enable better risk management as the loan-to-value (LTV) ratio is fixed at 75 percent. Though the near-term impact for some of the NBFCs could be challenging but in the long run, it will be inculcating a better credit risk culture. The new LCR norms are now made effective from April 1, 2026, providing enough time for banks to plan the structural liquidity pattern. Banks should focus on finding ways to increase the flow of credit to productive sectors of the economy, with a focus on manufacturing, particularly to MSMEs. The impending lower interest rate regime should help banks to raise funds at a lower cost that can be passed on to borrowers to push the credit growth and stimulate the economy. All pointers are signifying the imminent rate cut of 25 basis points now unless the RBI goes aggressive to opt for a 50 basis points. A calibrated reduction of interest rates is desirable to enable efficient transmission of rates and provide latitude to markets to adjust their cost dynamics. However,, a low-interest rate regime is a welcome recipe for growth. Facebook Twitter Linkedin Email Disclaimer Views expressed above are the author's own.
Time of India
22-04-2025
- Business
- Time of India
Transforming business models of banks
Dr Rao is currently teaching risk management in the institute of Insurance and Risk Management (IIRM). A career banker with Bank of Baroda, he held the position of General Manager - Strategic Planning, Later was Associate Professor with National Institute of Bank Management (NIBM) and was Director, National Institute of Banking Studies and Corporate Management (NIBSCOM). He writes for financial dailies on Banking and Finance and his work can be viewed in the public academic accomplishments include Ph.d in commerce from Banaras Hindu University (BHU), MBA ( Finance), LLB. He runs a Youtube channel - Bank on Me - Knowledge series He likes to share his perspectives with next generation potential leaders of the banking industry. His book on "Transformation of Public Sector Banks in India' was published in september 2019. His most interesting work is in blog. LESS ... MORE Banks are experiencing a tectonic shift in their asset-liability structure. Besides many, the key reason is compelling banks to borrow short and lend long due to a change in the pattern of resource inflows. The incremental credit deposit (CD) ratio is on the rise. The deposit growth has been trailing behind credit growth in the last three years. Deposit growth was 10.3 percent, 10.97 percent, and 14 percent during FY22, FY23, and FY24. The bank credit growth was at 13 percent, 17.3 percent, and 20 percent, surpassing deposit growth during the same period. Along with lower deposit growth, the Current Account and Savings Account (CASA) ratio is on the decline from 43.68 percent in FY22 to 39.95 percent by March 2024, as higher interest on term deposits is prompting customers to use term deposit products for placing savings. Banks are drawing on refinance wherever eligible to fund demand for credit, tapping RBI's Liquidity Adjustment Facility (LAF) windows, and borrowing from money markets and raising funds through certificates of deposits (CDs) at higher interest rates to meet the liquidity needs. The structural shift of ALM: The depletion in the household savings, increasing financial and digital literacy, digital banking system providing ready access to bank accounts, demographic shift in customer profile with higher risk appetite, etc, are synchronising with the development of alternate investment avenues for better perceived risk-adjusted returns. These developments are contributing to protracted ALM mismatches, increasing spill over to interest rate risk, and even impeding growth in some banks. RBI data on the Maturity Profile of Select Liabilities/Assets also resonates with the new trend. The percentage of liability book (deposits and borrowings) of over 5 years was at 42.5 percent, far shorter than the corresponding asset book (loans and investments) of over 5 years, held at 57.5 percent in March 2024. Similarly, even the share of low-cost current and savings (CASA) deposits to total deposits is also in decline. As of March 2024, even on a strong base of 265 crore deposit accounts and 40 crore borrowers, deepening financial inclusion, digital payments churning higher volumes, deposit accretion is unable to keep pace. During monetary policy – April 9, 2025, the repo rate has been brought down by 25 basis points to 6 percent. Since the portion of loans linked to external benchmark repo rates is repriced down, banks have started resetting their deposit interest rates down. The interest rates on savings bank and term deposits are softening to protect the margins of banks. Such realignment of interest rates becomes a market-driven necessity. What is more important for banks is to consider recasting the business models to stay competitive. Business Models of Banks: Even when the operating environment is changing, the business model (BM) continues to harp on mobilising deposits to balance lending and investment, subject to regulatory norms. In the last decade or so, due to increasing interconnectedness with NBFCs, collaboration with FinTech, embedded financing, and app-based lending, several new features have been added to core and non-core businesses. The focus is shifting to garnering fee income from non-core businesses, strategic alliances, identifying strategies for managing the risks associated with interconnectedness, and outsourcing risks. Interoperable technology has enabled centralisation of many homogeneous activities to a remote location operating on assembly line principles for faster turnaround time. The shift in BM driven by change in market dynamics is not adequate unless it is fully customised by the banks, well aligned with the mix of evolving assets and liabilities, and its maturity profile. With intense competition from NBFCs, differentiated banks, and Fintech collaborations and the insurance sector recharged after Covid-19, the BM of banks needs to reshape to align with current realities to manage risks, develop resilience to adopt new lines of business, and address challenges. Banks should factor the impact of PESTLE, VUCA, and SWOT analysis built upon the power of new forms of technology such as big data, analytics, ML, DL, AI, agentic AI, GenAI, and quantum computing techniques. It is also important to test the efficacy of BM by using simulation and stress testing to align with the best feasible business combination and risk management practices. While freezing BM for say 5 years, its annual review will help to factor in risk events like the presently unleashed tariff war, which can change the business equation. Way forward: The mandarins of the banking system have been harping on banks to work out new business strategies to aggressively mobilize resources, create avenues to expand credit to lift the credit-to-GDP ratio from the present 56 percent to 130 percent to meet the aspirations of Viksit Bharat–2047. With only 2 Indian Banks in the top 100 global banks, Indian banks are trailing far behind in terms of asset size in the global ranking. Banks should shore up their asset base and improve their risk appetite to get to a stronger footing. In the recent monetary policy RBI expanded the scope of Co-lending among regulated entities, refining the regulatory dimensions governing Gold Loans, and guidelines on partial credit enhancement are poised to be made more friendly for large borrowers to raise funds from the market. Grasping the spirit of changing regulations, regulated entities should make the BM receptive to change. Banks should explore the use of AI tools to identify soft spots where blue ocean strategies could be applied to potentially create new avenues to lasting business solutions. Financial inclusion data should be analysed to find the aspirational districts that have more potential to grow and direct the resources to such geographies to optimise efforts. While regulations are based on 'One size fits all', the regulated entities can always align them to suit their SWOT and tap those appropriate business opportunities. The BM should be made flexible to tap the buoyancy in the economy. BM should fit the structural liquidity pattern and risk based pricing of assets and liability products for balanced growth and profitability to stay ahead in competition. Given increasing expectations from the banking sector, BM needs to be revamped and reinvented, driven by new tools of technology to explore the emerging opportunities for growth and cope with risks. Regulations and government policies are set to be more supportive to enable banks to enforce a high standard of governance, risk, and compliance for funding growth and ensuring financial stability. BM has to be re-engineered with vision and fortitude, laying a firm foundation for steady growth while exploring blue ocean strategies to reinvent growth. Facebook Twitter Linkedin Email Disclaimer Views expressed above are the author's own.
