Mouka pe chowka? Banks are adequately pricing risk, says SBI report
2 min read . Updated: 08 Nov 2022, 06:01 PM IST
PremiumCredit demand at all time high and liquidity remains significantly downsized, says research
Banks are not adequately pricing its credit risk as the liquidity condition tightens and interest rates remain high, said State Bank of India in a research report.
Over the last few months, the Reserve Bank of India (RBI) has front-loaded rate hikes and calibrated excess liquidity in the banking system as it seeks to rein in elevated inflation.
While the liquidity conditions have eased in November as the government accelerating spending, the average net durable liquidity injected into the banking system has dropped to ₹3 trillion from ₹8.3 trillion in April, SBI research said in its latest ‘Ecowrap’ report. The government has spent a large part of its cash balances in the Diwali week, and as a result the net LAF (liquidity adjust facility) in the system, which was hitherto negative, has improved of late. Bonus payments by the government and the private sector also helped.
“Even as the banking system has moved closer to a calibrated liquidity coupled with higher signalling rates, one thing has still not changed; that is credit risk not getting adequately priced in, even as credit demand is at decadal highs and liquidity remains significantly downsized," said the report by India’s largest lender.
“A back of envelope estimate suggests that the core funding cost of the banking system is currently at around 6.2%, while the reverse repo rate is at 5.65%. No wonder, banks are currently engaged in a fierce war to raise deposits, with rates being offered up to 7.75% in select circumstances," it said.
After 2020, the RBI infused large amounts of liquidity in the banking system in order to ensure credit to productive sectors amid the Covid crisis. However, in 2022, the central bank began withdrawing accommodation and raising interest rates as inflation has remained well above its target.
According to SBI’s research team, it was intriguing that while the banking system had witnessed episodes to net deficit liquidity, the risk premia, over and above the core funding cost was not sufficiently acknowledging credit risk.
“For example, short tenor working capital loans of less than 1 year are given even with finer rates at lower than 6% linking with 1M/3M T Bill rates. 10-year and 15-year loans are being priced at less than 7%," the report said.
It is to be noted that 10-year G-Sec is currently trading around 7.46 per cent, while the 91-day T-bill is trading at around 6.44 per cent and 364-day T-bill at around 6.97 per cent.
According to the results of banking sector reveal that average y-o-y profit growth close to 50%, and jump in net interest margin by a sharp 35 basis points. Initial results, from around 675 listed entities, show top line growing by 32% with EBIDTA shrinking by 15% in second quarter of FY23.
"The good thing is that with capex on rise, Nifty PSEs Index market cap has increased by 35.6% in current year as compared to 3.52% of Nifty 50 index," the report added.
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