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Time of India
an hour ago
- Business
- Time of India
Structural deposit pressure off Indian banks; thanks to RBI's liquidity steps: Fitch
Indian banks are getting much-needed relief from structural deposit pressures due to the Reserve Bank of India's aggressive liquidity support measures introduced this year, Fitch Ratings said in a recent report. Tired of too many ads? go ad free now Since January, the RBI has pumped roughly Rs 5.6 trillion, equivalent to about 2% of total banking system assets, into the financial system via government securities purchases. This resulted in a liquidity surplus since March that has sharply softened funding conditions across the sector. This, Fitch said, has helped ease the intense battle for deposits that had gripped banks over the past year. The mismatch between strong credit demand and slower deposit growth had pushed up loan-to-deposit ratios, forcing lenders to hike rates to attract savers. But the RBI's liquidity support, alongside a 100 basis point cut in the cash reserve ratio (CRR), set to unlock another Rs 2.7 trillion in phases, has begun reversing that strain. Fresh deposit costs are already trending lower. Fitch still expects banks' net interest margins to shrink by 30 basis points in FY26, as a large chunk of outstanding loans get re-priced downwards. However, margin pressure is likely to ease in FY27, as deposit costs fall further and the CRR cut starts delivering longer-term benefits. Loan growth for FY25 is pegged at 11%, just above the estimated 9.8% nominal GDP growth, suggesting growing appetite for risk among lenders. Still, Fitch warned that the relief may be short-lived if the RBI is forced to pull back liquidity to counter inflation or stabilise the rupee. Such a move could push funding costs higher once again and eat into margins. In short, while the RBI's liquidity easing has brought meaningful short-term relief, the durability of these gains depends on broader economic stability and continued policy support.
Time of India
2 hours ago
- Business
- Time of India
Prospects of banking in India
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 The recently published annual report of RBI – FY25, the Monetary Policy of RBI – June 6, 2025, and the Financial Stability Report (FSR) – June 2025, all unanimously observed that the economy is strong, resilient, and remains one of the fastest-growing large economies. The IMF states that the Indian economy will continue this trend in 2025 and 2026. RBI's forecast for GDP growth in FY26 is 6.5 per cent, potentially reaching 6.7 per cent in FY27, providing a solid foundation for rapid growth across various sectors. If the Indian economy is to reach a GDP of US $30 trillion by 2047 and become a developed economy, it must grow at an average of 8-9 per cent annually. To accomplish this, it will need strong support from both banks and non-banks to lend sufficiently to entrepreneurs and stimulate growth. The coordinated efforts of banks and non-banks in lending to enterprises will be vital to unlock the full potential of the economy. The assets in the financial services sector need to grow twenty times larger than they are now. By March 2025, the total value of assets in the financial industry is expected to range between Rs 730 trillion and Rs. 760 trillion. Banks primarily drive India's economy. Out of the estimated average total assets of Rs760 trillion in the financial sector, banks make up 55 percent, with Rs 415 trillion in assets. The Reserve Bank of India (RBI) accounts for 10 percent, with Rs 76 trillion in assets. Insurers hold a 15 percent share with assets valued at Rs. 115 trillion, while all other NBFCs, including fintechs, have around Rs159 trillion in assets. The financial system could grow 20 times, so banks should adopt innovative technology tools to support sustainable growth, employment, education, and healthcare, which are essential. However, success will depend on strong banking systems with coordinated partnerships with NBFCs, including fintech innovation, and the integration of the informal economy. Due to a limited asset base, only two Indian banks currently rank among the top 100 international banks. The State Bank of India (SBI), in 43rd place, and HDFC Bank, in 73rd place, are included in the top 100 global banks by assets, according to S&P Global Market Intelligence's April 2025 ranking. India, despite being the fourth-largest economy, has only two banks on this list. This was pointed out in several forums and highlighted in the economic survey, emphasizing the need to increase the asset base of banks. This underscores the need to expand its asset base and enhance credit risk appetite. While Indian banks have sufficient capital adequacy, their credit-to-GDP ratio remains low at only 62 per cent. In comparison, China's credit-to-GDP ratio is 161 per cent, Japan's is 314 percent, the US's is 210 per cent, the UK's is 145 per cent, and South Africa's is 133 percent. Indian banks should increase their credit risk appetite to align with the credit-to-GDP ratios of their global peers. More lending/deposit schemes aligned to the changing demographic profile are needed to compete actively with alternative market players. 1. Gearing up for higher growth: In the coming years, to grow the banking system's assets, an additional Rs 4 trillion in new capital will be needed. The IPO market is thriving. In 2024, equity markets raised IPOs totaling Rs1 lakh crore. Retail investors now hold over 170 million demat accounts. There is a growing focus on insurance penetration and resilience, including popular schemes like Ayushman Bharat and fintech-driven microinsurance. In the area of technology adoption, banks can further develop cloud computing and AI, which includes machine learning, blockchain, and data analytics. Fintech convergence introduces cyber risks—adopting a zero-trust security model, AI-based fraud detection, regular drills of Business Continuity policy (BCP), and compliance with RBI, IRDAI, and SEBI are essential. Jan Dhan, Aadhaar, and Mobile (JAM) trinity greatly expanded banking access. Different types of banks – Small Finance Banks, Payment Banks, and NBFCs – also partnered heavily in financial inclusion efforts, with fintech playing an active role. The benefits of widespread financial inclusion and digital adoption should support the MSME sector, which makes up about 30% of GDP, but only 40% of these businesses are officially banked; increasing that to 80% could be transformative. It's observed that NBFCs provide 23 per cent of MSME credit and leverage technology and local networks to serve underserved segments. RBI establishes a regulator-led, tiered oversight system to support them. The government encourages NBFCs to increase their share of credit to MSMEs from the current levels to 50 per cent. Banks and NBFCs must collaborate to enhance lending quality to the MSME sector through better credit risk management and technological advancement. Post-NPA reforms—such as IBC 2016, the formation of IBBI, activation of NCLTs, and the creation of NARCL (Bad Bank), reforms of ARCs—have improved banks' asset quality. In an AI-driven, constantly changing work environment, as many industries adopt 'AI Virtual Assistants', the threat of skill redundancy looms. Even autonomous AI super agents are entering the industry to perform independent teamwork. Reshaping skills and strategic skill-building will be necessary. Individual employees in banks must focus on their innate talents and develop appropriate skills to stay relevant in the industry. Therefore, the financial sector needs talent in various areas such as strategy, leadership, market intelligence, and the ability to understand macroeconomic and geopolitical trends. New skills required include AI, cloud computing, cybersecurity, risk management, accounting and audit, digital onboarding, and compliance. Collaboration among banks, fintechs, academia, and NISM can foster continuous learning and innovation hubs. 2. State of the Banking system: FSR June 2025 indicated that banks maintain strong capital buffers (CRAR around 17.2–18.0%) and have multi-decade lows in NPAs (2.3%), positioning them to withstand adverse shocks. Even under stress scenarios—such as a global slowdown or banks' worst debt outcomes—capital levels remain well above the 11.5 % regulatory minimum. Banks have sufficient resilience to support growth and absorb shocks. However, some concerns exist for banks, as the cost of credit might increase, impacting the pricing of loan products. Following the Covid-19 pandemic, household debt has risen to 42% of GDP. Growing unsecured retail lending (credit cards, personal loans) needs close oversight. It will be essential to overhaul and significantly improve the underwriting standards of credit to ensure sustainable growth with faster processing times and appropriate risk-adjusted pricing. A gradual and balanced lending approach, risk adjusted well calibrated sectoral exposure to credit, targeting quality over quantity, could make a whole lot of difference to sustained credit quality. FSR also highlights vulnerabilities related to the rapid adoption of digital lending channels, cybersecurity, and vendor risks. RBI's broader framework including goals like sandboxing, UPI interoperability, digital rupee (CBDC), and AI in risk management—suggests future growth in digital finance. A digitally empowered banking ecosystem, supported by stronger technology governance. Banks' internal macroeconomic intelligence system must be upgraded to detect the impact of heightened geopolitical tensions and trade uncertainties, which could pose hidden risks to bond markets and capital flows. Substantial foreign exchange reserves, surpassing US $700 billion, and resilient domestic demand help cushion external shocks. Banks will maintain vigilance and will be working on strategies for liquidity and capital aligned with global volatility. Facebook Twitter Linkedin Email Disclaimer Views expressed above are the author's own.
Hans India
2 hours ago
- Business
- Hans India
ELI scheme next step after PLI: Minister
New Delhi: The employment-linked incentive (ELI) scheme represents the second step after the production-linked incentive (PLI) scheme in the direction of building an Atmanirbhar Bharat, Labour Minister Dr Mansukh Mandaviya has stressed. The ELI scheme will provide financial support to employers, enabling them to generate additional employment, particularly for the minister described the initiative as a win-win for both employers and job a total outlay of Rs99,446 crore, the ELI scheme aims to create over 3.5 crore jobs across the country over a two-year period. During a high-level virtual meeting of state labour ministers and state industry ministers, he cited KLEMS data, published by the Reserve Bank of India (RBI), highlighting that over 17 crore employment opportunities were generated during the last decade, according to a Ministry of Labour and Employment statement. This, he noted, is a reflection of the significant economic progress made by the country, particularly driven by robust growth in sectors such as construction, manufacturing, and services. DrMandaviyaemphasised that this momentum must be sustained and further accelerated through schemes like ELI, which are designed to create quality jobs, deepen formalisation, and support inclusive development. 'Labour and industry are two sides of the same coin,' the Minister said, adding that both must work in close coordination for the greater good of the nation's workforce and economy. He assured participants that procedural formalities under the scheme have been kept simple to ensure ease of access and encourage wide participation. The Union Minister also urged state ministers to actively promote the scheme through media briefings, television and radio interviews, and other outreach platforms.
Hans India
2 hours ago
- Business
- Hans India
Indices rebound on rally in auto, pharma stocks
Mumbai: Stock markets snapped the four-day falling streak on Tuesday with the benchmark Sensex rebounding by 317 points on buying in auto and pharma shares amid a decline in retail inflation to a more than six-year low, nearing the RBI's comfort zone. The 30-share BSE Sensex climbed 317.45 points or 0.39 per cent to settle at 82,570.91. During the day, it jumped 490.16 points or 0.59 per cent to 82,743.62. The 50-share NSE Nifty edged higher by 113.50 points or 0.45 per cent to 25,195.80. In the last four trading days, the Sensex dropped 1,459.05 points or 1.74 per cent and the Nifty declined by 440 points or 1.72 per cent. Among Sensex firms, Sun Pharma, Trent, Tata Motors, Bajaj Finserv, Mahindra & Mahindra and Bajaj Finance were the major gainers. However, HCL Tech declined 3.31 per cent after the IT services firm reported a 9.7 per cent drop in consolidated net profit for the June quarter, hurt by higher expenses and the one-time impact of a client bankruptcy. Eternal, Tata Steel, Kotak Mahindra Bank and Axis Bank were also the laggards. Retail inflation declined to over six-year low of 2.1 per cent in June, nearing the RBI's comfort zone, on account of subdued prices of food items, including vegetables, driven by widespread monsoon.
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Business Standard
2 hours ago
- Business
- Business Standard
RBI's liquidity steps to aid 100 bps rate cut transmission in 2025: Fitch
The Reserve Bank of India 's (RBI) aggressive liquidity injections this year are likely to ensure the effective transition of the entire 100 basis points of policy rate cuts announced so far in 2025, Fitch Ratings said on Wednesday. Fitch said the RBI's actions represent a clear policy shift aimed at supporting loan growth while avoiding a spike in funding costs. 'This is reflected in increased system liquidity and falling deposit costs, which should enable transmission of 100 basis points in policy rate cuts in 2025,' the credit rating agency said in a statement. The RBI has cut rates three times this year: 25 basis points each in February and April, and a sharper 50 basis point cut in June, marking the first easing cycle since May 2020. ₹5.6 Trillion already pumped in Since January 2025, the RBI has injected about ₹5.6 trillion into the banking system through durable liquidity measures such as government securities purchases. This amounts to roughly 2 per cent of system assets, creating a sustained surplus in liquidity since March. The central bank's additional move to cut the cash reserve ratio (CRR) by 100 basis points, announced in June, is expected to release a further ₹2.7 trillion in liquidity in a phased manner, giving banks more headroom to reduce lending rates and boost credit growth. 'These steps have significantly eased funding conditions,' Fitch said. 'This is evident in rising liquidity surpluses and falling deposit costs.' Margin pressures likely short term Fitch expects Indian banks' net interest margins to come under some pressure in the near term, as a large portion of their loan books will be repriced at lower interest rates relatively quickly. While falling deposit costs are expected to aid banks, Fitch also projected a 30 basis point contraction in net interest margins in the financial year ending March 2026 (FY26). However, this should ease in FY27 as falling deposit costs begin to offset lost interest income. 'Surplus liquidity conditions will likely accelerate the decline in the cost of fresh deposits,' Fitch said. Loan growth and risk outlook Fitch also cautioned that while lower rates may support asset quality, a sharp pickup in loan growth could carry its own risks. 'Funding and liquidity conditions remain sensitive to changes in the central bank's liquidity stance and shifts in retail savings,' the agency said. Although higher credit expansion may elevate risk, Fitch noted that improved risk pricing mechanisms and ample liquidity could provide a buffer.
