Clipped from: https://www.thehindubusinessline.com/money-and-banking/considerable-gap-between-demand-and-supply-of-funds-in-banking-system-to-continue-in-fy24-bob-report/article66552616.ece
To continue with the higher pace of lending, they could consider digging into their own capital or reserves and surplus going forward, experts said
Since banks’ net profit have improved significantly they are well-placed in terms of capital
The considerable gap between demand and supply of funds in the banking system is expected to continue even in the coming year (FY24) despite anticipation of moderation in pace of nominal growth, according to a Bank of Baroda economic research report.
In FY23 so far, relatively well-placed macro fundamentals and pent up demand contributed to faster pace of credit growth, which outpaced deposit growth where transmission to rates have been relatively slower as the new rates apply to fresh or renewed deposits while the existing ones remain unaffected, said Economists Dipanwita and Sonal.
They emphasised that this has widened deficit significantly in context of liquidity in the current fiscal.
The economists noted that significant quantum of Long Term Repo Operations (LTROs)/ Targeted Long Term Repo Operations (TLTROs) are maturing in FY23 and FY24, which will put additional strain on liquidity. “This can be corrected through conduct of RBI’s long-term variable rate repo operations, with the frequency being increased. Or there could be OMOs (open market operations) to induce liquidity in the system on a permanent basis if required,” the economists said
Also, since banks’ net profit have improved significantly they are well-placed in terms of capital.
Thus, to continue with the higher pace of lending, they could consider digging into their own capital or reserves and surplus going forward.
The BoB economists assessed that based on the assumption of 11.5 per cent growth in nominal GDP and incorporating the credit-GDP multiplier (calculation based on past 10 years data show that credit-GDP multiplier is around 0.98), the incremental change in credit comes to around ₹15.3 lakh crore in FY24.
The report said FY24 will be a crucial year, as some slowdown on growth front is expected, due to spill-over effect of muted global growth.
“For investments, we have assumed the same percentage of holding of securities by banks (38 per cent-Centre, 34 per cent-State). We expect accretion of around ₹6.5 lakh crore…Thus the total demand side translates to around ₹21.8 lakh crore,” the economists said.
On the supply side, accounting for the deposit-GDP multiplier, there is expected to be an accretion of around ₹19.4 lakh crore in FY24. “This is also based on the assumption that higher deposit rates is likely to continue in the competitive space for some time …Adjusting for CRR, deposit accretion in FY24, turns around ₹18.6 lakh crore,” as per the assessment by the economists.
Thus in FY24, the deficit or the gap between demand and supply of funds is expected to come around ₹2.3 lakh crore (₹4 lakh crore in FY23). The moderation is on account of slight slowdown in pace of credit growth in line with GDP growth.