In This Economy… Trust In Banks, But Verify The Liquidity

Happy Tuesday! This week India is busy hosting US Vice President JD Vance and his family. On the day of his visit, India’s competition commission was quick to settle Google’s Android TV case for Rs 20 crore. This case has been going on since 2021 and is now the first one to be settled under the amended Competition Act where settlement and commitment provisions were added in 2023.The timing could not have been better, as India also simultaneously imposed an additional 12% tariff on steel imports. This, of course, is to dissuade Chinese imports flooding the local market.The Vance visit is also coming at a time when India and the US are in the middle of a bilateral trade agreement, following President Donald Trump’s global tariff announcements.Will this be enough to convince the US that India is a good partner to further negotiate tariffs with? We’ll have to wait and see.Onto this week’s newsletter!.The bank quarterly results season was kickstarted by HDFC Bank, ICICI Bank and Yes Bank on Saturday. The results show that private banks have managed to get over the hump they were facing for the last few quarters, as margin expansion makes a comeback. All three lenders saw their net interest margins expand, showing that the quality of their profitability has certainly improved.But hold your horses. This is most likely short-lived. Banks were quick to point out that recent rate cuts by the Reserve Bank of India will likely make their presence felt in upcoming quarters. The math is simple: loans get repriced lower much faster than deposits do.That means banks continue to pay higher deposits on a large chunk of their base for longer, even as interest income on loans will come down faster.Additionally, government bond yields have been inching lower. On Monday, the yield on the 10-year benchmark bond dropped 5 basis points to 6.31%, dropping to over a three-year low. Banks being some of the largest investors in these bonds will earn less.To cover their bases, large private banks have cut their savings account rates. Savings account deposits being the cheapest source of funding for banks, the rate cuts could boost cost management. But that depends on depositors choosing to keep most of their money in their savings accounts.Some estimates suggest nearly 50% of private sector bank loans are linked to the repo rate, ensuring faster transmission. This includes new loans and those already disbursed. Lower deposit rates, though, will bring down costs only over a couple of quarters.Not long ago, most experts said that something had fundamentally changed in the way customers put money in banks. Call it yield farming or poor product pull from banks; people are just not keen on placing funds for long in savings accounts. The recent rate cuts will test that hypothesis further.Banks look far less worried now, especially considering the excess liquidity they are sitting on. As of April 20, the liquidity surplus for the system was at over Rs 1 lakh crore. Moreover, banks are not even tapping the RBI’s short-term variable rate repo window as much. Of the Rs 1 lakh crore notified under the one-day repo operation by the RBI, banks bid only for Rs 6,332 crore.Part of the reason behind this is also the fact that banks are shunning the short-term liquidity measures, as they have limited visibility in liquidity planning for the medium term.RBI also thought it was appropriate for it to come out with the long-awaited liquidity coverage ratio framework amendments. On Monday RBI released the new framework, albeit with much easier terms. Banks need to set aside a smaller 2.5% additional run-off rate for retail deposits enabled with internet and mobile banking. A draft from July 2024 had proposed a 5% additional run-off rate. Moreover, the draft proposed classifying retail deposits into “stable” and “less-stable”, recommending higher total run-off rates of up to 15% for the less-stable.Basically, banks need to set aside less money against retail deposits which are at the highest risk of being withdrawn immediately.The original idea behind introducing such norms was for India to avoid a Silicon Valley Bank situation. In March 2023, the US-based bank’s depositors quickly withdrew money across branches, leading to a run on the bank. This was because there were fears of a bank failure.India has never let a commercial bank fail, even though cooperative banks have faced such circumstances. Depositors, across all banks, are also heavily insured. The Deposit Insurance & Credit Guarantee Corporation ensures deposit payouts up to Rs 5 lakh in the event of a bank going into serious financial trouble and subsequent RBI action..1. Maharashtra state has told its RTOs to shut any Ola Electric stores which do not have a trade certificate in order. Tushar Deep Singh reports.2. SEBI’s latest order shows how Gensol Engineering promoters allegedly moved money from company accounts to personal coffers. Charu Singh reports.3. India’s financial capital saw its tap run dry last week, as water tankers went on a major strike. The shiny Bandra Kurla Complex saw office goers work from home. Charu Singh’s ground report is excellent.4. Walmart-owned PhonePe has decided to become a public limited company ahead of its planned IPO. Agnidev Bhattacharya reports.5. India’s benchmark bond had an eventful day on Monday as yield dropped 5 basis points in a day, falling to its lowest in over three years. Subhana Shaikh explains what happened..Pope Francis died on Monday, at the age of 88. The leader of the Catholic Church was recently suffering from pneumonia related complications, on top of his existing chronic lung disease. The Pope stayed on for 12 years after he was selected because his predecessor suddenly decided to step down. This obituary by the Associated Press tells you about all the highs and lows of the Pope better than any AI app can.

In This Economy… Trust In Banks, But Verify The Liquidity

Private banks post stronger margins, but RBI rate cuts and falling bond yields may test their resilience.

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