Year of the depositor in 2023? – The Hindu BusinessLine

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Monetary moves. As banks gear up to fund rising credit appetite, depositors may benefit, as inflation risks recede

Depositors are likely to benefit in 2023 after a hard year of falling rates | Photo Credit: AJAY VERMA

The banking industry is set to enter into an interesting phase of growth in 2023. In the course of this year, repo rates have been raised by 225 basis points to combat inflation. The RBI retained fixed rate reverse repo at 3.35 per cent and introduced Standing Deposit Facility (SDF) on April 8 at an interest rate of 3.75 per cent (25 basis points less than repo rate) that now stands at 6 per cent for absorbing excess liquidity without interchanging collaterals.

Buoyed by the demand for credit arising from speedy revival of the economy, credit growth in banks touched 17.5 per cent while deposits were growing sluggishly at 9.9 per cent as on December 2. While banks are definitely beset with increasing liquidity risks in 2023, as of now the situation is manageable, as absolute incremental growth trends of credit and deposits are growing in tandem.

This is more so, when banks have surplus investments in SLR securities in the range of 26-28 per cent as against 18 per cent which could be drawn to fill the liquidity void, if any. The accelerated credit activism is also evident from incremental credit deposit (CD) ratio that has been staying above 100 per cent since August 2022.

But going forward, 2023 will definitely be the year for depositors who may enjoy positive real rates of interest — with inflation plunging and deposit rates going up. Stiff competition for deposits will further heighten rates.

Improving economy

A resilient economy is the bedrock for sustainable growth of business in banks. Macroeconomic fundamentals are strong in the backdrop of GDP growth in Q1 at 13.5 per cent and Q2 at 6.3 per cent. The trend reflects a strong sequential momentum, with gross fixed capital expenditure looking up.

The fiscal is expected to end GDP growth at 6.8 per cent with Q3 and Q4 at 4.4 and 4.2 per cent, respectively. Growth impetus can bring back private investments, prompt diversification, can increase capacity utilisation with an upturn in the capex cycle. This is all the more possible, as corporate sector had deleveraged their balance sheets in last two years and are on a firm footing to grow faster. The Budget 2023-24 can spur higher investment in infrastructure, trade and industry. This scenario can can add renewed business opportunities for banks.

Inflation fight

Having started to combat inflationary headwinds since May 2022, the RBI is seeking to bring it back to the 4 per cent mark. It is managing a non-disruptive rise in policy rates with a well calibrated absorption of liquidity. As a result, CPI inflation print in November receded to 5.88 per cent together with WPI falling to a 21-month low to 5.85 per cent. But with core inflation (net of food and fuel) remaining sticky above 6 per cent, the upside risks to inflation cannot be ignored.

The external spillover risks to inflation continue to pose a danger. Crude oil prices have dropped from its high of $130 per barrel on March 8, 2022 following the beginning of hostility between Russia-Ukraine, softening to $80 a barrel now. The trend is likely to remain in the range of $100 +/- 10 US $ with OPEC + expected to regulate supplies to avoid price shocks.

But continuing war and changing geopolitical risks, diplomatic polarisation, slowing global economy and trade indices, put together pose spillover risks to emerging market economies — that are more vulnerable to external shocks. Despite the innate resilience of the Indian economy, sensitivity towards emerging global risks in articulating a pathway of growth-inflation dynamics is the pragmatic way. The domestic economy cannot be entirely decoupled with rest of the world.

Prospects in 2023

Interest rate hikes having peaked in 2022, the next year will see hikes, if any, in smaller doses with a likely pause in early 2023. The system liquidity too is near neutral, well on its way to withdrawal of accommodation. Taking a cue from the minutes of the last monetary policy, the ongoing tightening phase may not sustain long in 2023. Growth may assume priority, particularly if inflation, including the core component, comes down. The findings from the RBI surveys of households, businesses and professional forecasters too provide ample optimism for growth prospects.

Banks need to work out strategies to mitigate climate risks by extending finance to green projects, to reduce carbon footprints and to achieve UN sustainable development goals in line with COP27 commitments. Financing alternate energy projects will need a different wherewithal including risk assessment and management systems.

The newly activated institution — National Bank for Financing Infrastructure and Development (NaBFID) — should assist banks in infrastructure lending including green projects. National Asset Reconstruction Company Ltd (NARCL) — bad bank should also ease the burden of toxic loans of banks to create space for fresh lending.

The newly opened 75 digital banking units (DBUs) should rev up financial inclusion to augment deposit resources and adopt digital lending. The pilot roll out of Central Bank Digital Currency (CBDC) even for retail use should be able to add speed to digital penetration.

Since a major section of society in India is already exposed to Covid-19 and is largely vaccinated acquiring hybrid immunity, its elevated risks seen in many parts of the globe may not disrupt commercial activities, life and livelihood in India in the new year.

Banks can look for innovation and improved operational efficiency to provide better experience to customers.

The writer is Adjunct Professor, Institute of Insurance and Risk Management – IIRM, Hyderabad. Views expressed are personal

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