NEW DELHI: Though the public sector banks (PSBs) have been able to sail through the latest global banking crisis with ease, they do face issues like unfavourable deposit repricing, declining market share of CASA, frequent repricing of loans, etc.
These concerns were discussed recently in a performance review meeting of PSBs held last week. As the global banking crisis unfolded after the collapse of Silicon Valley Bank (SVB) and Credit Suisse, the government has identified several challenges faced by the country’s PSBs. The Department of Financial Services (DFS), Ministry of Finance, in its presentation, highlighted the challenges face by PSBs.
As per the DFS presentation, PSBs are raising bulk deposits and funds via certificate of deposits (CDs) at higher rates, deposit repricing terms are also not in favour of these banks even as they have to deal with frequent repricing of loans linked to external benchmark rates. It was also highlighted that PSBs’ market share of CASA (Capital Accounts and Savings Account) deposits have fallen from 70% in FY14 to 58% in FY22 even as industry CASA deposits have gone up from 34% in FY14 to 45% in FY22.
Another area of concern raised by the ministry is yields may no longer outpace increase in cost of funds, resulting in fall in net interest margin (NIM), as deposits begin to be upwardly priced. NIM is a measure of profitability for banks. Higher the NIM the better it is for banks.
As per a recent RBI report, the median term deposit rates on fresh deposits rose by 82 bps during May 2022 to February 2023. As a result, term deposits recorded a growth of 13.2% on annual basis, whereas current and savings deposits rose at 4.6% and 7.3%, respectively. Higher share of CASA deposits is considered good for banks as they are cheaper than the term deposits.
The ministry hinted at potential rise in mark-to-market (MTM) losses as PSBs available-for-sale (AFS) bond exposure book was at Rs 10.67 lakh crore (28.6% of total investment, 7.9% of total assets and 12.9% of total gross advances), as of December 31, 2022. AFS bond investments are recorded at market price, hence any drop in bonds prices has to be reported as loss.
Achilles heel