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Rising corporate debt market: With credit growth not moving in a desirable way (as shown in the Figure 1) over the few months, and a continued delay in the land and environmental clearances, there is no expectation of the growth revival in the nearest future. According to CRISIL, there is a significant scope to India’s debt market which is only nearly 17% of the GDP (compared to 123% of USA 77% of South Korea and compares poorly to many of the Asian emerging economies) [1] and the push from regulators like RBI and SEBI, the corporate in the near future would bypass the banks for their funding requirements. This would further decrease the lending portfolio for the banks and force them to look for alternatives.
Returns on G-Sec bonds: The government and the RBI have made financial inclusion as an agenda and gave licenses to the new banking entities like payment banks and small finance banks. Through this, the government brought a permanent customer for its debt. As payment banks park 75% of their deposits and SFBs park as per SLR requirements, the G-Sec bond’s demand increases and the cost decreases. This situation is expected to worsen further as the government is very committed on decreasing the overall fiscal deficit.
Alternative Avenues of Lending: With mounting Non-Performing Assets in public as well as private sector banks, the banks are increasingly focusing on retail and small business lending. However, these in a larger scale may not be a good alternative because of the limited knowledge on the credit history of such customers. Though the credit rating agencies have succeeded in providing credit ratings to the SMEs, the percentage of rating penetration is minuscule. The banks which struggle to complete their priority sector lending of 40% every year will find it very difficult to depend on this sector for higher lending. The banks now will also have to compete with the small finance banks (out of which most are Micro Finance Institutions) which have a 75% priority sector lending requirement who would target at Micro Small Medium Enterprises. The increased competition would result in lesser margins and thus impacting the returns of the banks as a whole.
Increased cost of funds: As per the economic survey of 2015-16, the gross domestic savings rate in the economy declined by 1.6 percentage points of the GDP from 2011-12 to 2014-15. The marginal propensity to save (MPS) of the Indian consumers is gradually decreasing and is indicated in the decreasing trend of public savings in the table 1. Bandhan bank which
started offering as high as 8% will be followed by the SFBs and these would become the favourites of price sensitive Indian customers. With the above two factors, there would be a decrease in the value as well as the volume of the savings increasing the cost of funds for the banks.