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Tag: RBI Bulletin

  • Banking sector appears well prepared in the current phase of hardening of yields: RBI Bulletin

    Banking sector appears well prepared in the current phase of hardening of yields: RBI Bulletin

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    The banking sector appears to be well prepared in the current phase of hardening of yields as the timely creation of investment fluctuation reserve (IFR) provides adequate buffers to withstand trading losses, per an article in RBI’s latest monthly bulletin.

    The investment fluctuation reserve (IFR) is created by transferring the gains realised on sale of investments.

    It enables banks to maintain an adequate reserve to protect against increase in yields on their balance sheet in the future.

    In the wake of the guidelines and with falling yields and resultant higher trading profits resulting in higher transfer of funds to IFR, the IFR has reached 2.2 per cent of HFT (held for trading) and AFS (available for sale) portfolio by end-March 2022 at the system level,said RBI officials Radheshyam Verma^ and Rakesh Kumar in the article “Impact of G-Sec Yield Movements on Bank Profitability in India.”

    Also read: Data Focus. Why transmission of repo rate hikes is slower in lending rates?

    Rise in G-sec yields

    However, with sharp rise in G-Sec (Government Security) yields and fall in bond prices in Q1 (April-June) :2022-23, banks recorded treasury losses in their trading book to the tune of 4.9 per cent of their operating profit.

    However, at the system level, SCBs (scheduled commercial banks) managed to maintain their IFR above 2 per cent which reached 2.7 per cent by March 2023.

    As compared to PSBs (public sector banks), PVBs (private sector banks) were more proactive in provisioning towards IFR, the authors said.

    Also read: Bankers’ views on RBI policy

    PVBs crossed 2.0 per cent of their HFT and AFS portfolio in September 2021, while PSBs reached IFR of 2 per cent in March 2022. Despite the hardening of G-Sec yields, PSBs and PVBs were able to manage IFR above 2 per cent.

    “Going forward, strengthening of risk management practices and internal controls by banks remains of paramount importance. Deepening of interest rate derivatives market also assumes significance in mitigating the adverse movements in interest rates on bank portfolios by encouraging the participation of banks for hedging and neutralising large changes in yields,” the RBI officials said.

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  • The ongoing ‘retail-shift’ by banks may not be structural: RBI Bulletin

    The ongoing ‘retail-shift’ by banks may not be structural: RBI Bulletin

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    Based on the estimated retail bank credit cycle, the ongoing ‘retail-shift’ may not be permanent, but rather cyclical in nature and the credit growth may not continue to be high, according to an article in RBI’s latest monthly bulletin.

    The Scheduled Commercial Banks’ (SCBs) expectations of retail credit demand moderated and loan terms and conditions expected to be tightened in Q3 (October-December):2024, RBI officials Sujeesh Kumar and Manjusha Senapati said in the article “Retail Credit Trends – A Snapshot”.

    Retail bank credit has emerged as a major contributor to the overall bank credit growth, especially after the onset of the Covid pandemic.

    The retail credit outstanding at the end of March 2023 was ₹40.85 lakh crore, more than double of that in March 2018.

    The share of retail loans by SCBs in aggregate credit had increased from 24.8 per cent in March 2018 to 30.7 per cent in March 2022 and further to 32.1 per cent in March 2023 – the highest among the sectors.

    Analysis

    Empirical analysis using quarterly data for the period Q1:2008 to Q3:2022 suggests that the retail credit segment and its major constituents (housing and vehicle) are sensitive to interest rates as well as the asset quality of the banks’ loan portfolio, the officials said.

    Housing loans are more sensitive to both interest rates and asset quality than vehicle loans for the same period, they added.

    “So far, the relatively better asset quality in the sector may have fueled retail credit growth. Given the global headwinds and increasing uncertainties about monetary policy actions across geographies, it is necessary to assess trends in retail credit at a granular level on a continuous basis to evaluate the impact of financial sector developments on the overall economy,” Kumar and Senapati said.

    The officials observed that the rise of retail loans did not occur in the post-Covid period suddenly.

    They underscored that the share of industries was substituted by the retail segment during the last decade itself. Gradually, a ‘retail-shift’ was observed in terms of credit growth dynamics.

    Bank-wise, there was reduced dispersion of retail credit growth in the post-Covid period, which implies that the credit growth was robust across the banks

    • Also Read: Banks end FY23 with a robust 15.4 pc credit growth

    “The higher credit growth in the segment might be result of ‘herding behaviour’ displayed by banks in diverting loans from industry to retail segment…The better asset quality in the retail segment also appears to be contributing to banks’ increased focus on retail credit.

    “However, this is not a risk-free segment and not a panacea for asset quality concerns in non-retail loans…,” the authors said.

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