May'21
The IUP Journal of Bank Management
Focus
The financial performance of banks is mostly measured using some major parameters like credit and deposit growth, profit growth, Net Interest Margin (NIM), efficiency-measured in terms of cost-to-income ratio, Return on Assets (ROA), and Return on Equity (ROE). NIM is widely considered to be a key indicator of a bank's earnings ability and is measured as the ratio of net interest income to average interest-earning assets. Besides being an indicator of earnings ability for a bank, NIM indicates the level of efficiency of a bank in efficient financial intermediation. Reserve Bank of India's (RBI) Financial Stability Report (July 2020) reveals that there has been a slowing down of NIM of Indian commercial banks at about 2.9% from September 2018 till March 2020. Spread and Current Accounts and Savings Accounts (CASA) funds largely impact the NIM of banks positively. Typically, the private banks maintain higher NIMs compared to public sector banks as they can manage to lend at relatively higher rates while lowering their deposit rates.
Urban Cooperative Banks (UCBs) numbering around 1,539 form an important segment of the cooperative banking sector in India. Since the liberalization of licensing policy by the RBI, there has been a proliferation in the number of UCBs. After having grown at an average rate of 7.8% till 2019, UCBs seemed to have stagnated during the year 2020, as the growth rate decelerated to 0.8% due to anemic credit offtake, a sharp decline in the resource base, episodes of frauds, and asset quality concerns.
The first paper, "Does Higher NIM Cause Cost Complacency and Credit Delinquency?" presents an interesting assessment of how UCBs with higher NIM handle cost complacency and experience adverse selection in credit decisions, resulting in higher Non-Performing Assets (NPAs). The author, Ashish Srivastava studies the interrelationship between NIM and operating expenses, efficiency ratio, and gross NPAs of UCBs in India. Essentially, the study argues that the possibilities of higher credit delinquencies are higher for banks with higher NIM and cost complacency. The study uses a sample of 150 banks, including both scheduled commercial private sector banks and UCBs, and offers a comparative analysis. The findings suggest that higher NIM in banks is not necessarily related to higher NPAs and hence, it can be deemed that higher NIM does not cause credit delinquency. Regarding cost complacency, the study reports that though the UCBs with higher NIMs reported higher operating costs, they were able to put up a superior efficiency ratio (cost-to-income ratio), and hence no cost complacency was observed. Thus, from the bank management perspective, the study findings imply that maintaining healthy NIM not only improves efficiency but also can counteract credit delinquency.
The second paper, "Microcredit-Backed Securitization (MBS): A Win-Win Scenario for MFIs and Investors", explores the application of securitization to microcredit and analyzes the benefits to both the originators and investors. The authors, C Anitha, S Galab and Raghunatha Reddy, study how securitization can be explored by the Microfinance Institutions (MFIs) to meet their funding requirements and spruce up their balance sheets. Adopting a descriptive approach, the study delves into the origin, concept, and application of securitization to microcredit considering the unique features of MFIs. The study views that securitization facilitates MFIs in minimizing their asset-liability mismatches, enhancing liquidity, and enabling strategic treasury management.
The final paper, "Inner Workings of Collateral-Based Stablecoins and Its Implications", offers an interesting study on Stablecoins. The author Gongpil Choi throws light on the inner workings of Stablecoins by examining their stabilizing property with various aspects of the collateral mix as well as pegging mechanism. The study further evaluates the initiatives to adopt gold and government bonds as combinatorial collateral. In the light of the concerns expressed by the Financial Stability Board (FSB) about the global Stablecoins that these cryptocurrencies can pose a potential threat to financial stability, this paper analyzes this newly emerging field of cryptocurrency and offers interesting insights on the possible risks and the associated challenges.
Consulting Editor
Does Higher NIM Cause Cost Complacency and Credit Delinquency?
This paper examines the importance of Net Interest Margin (NIM) for banks' profitability and investigates whether the banks with higher NIM face cost complacency and suffer from adverse selection in their credit decisions and hence, higher Non-Performing Assets (NPAs). It evaluates the relationship of the level of NIM with the banks' wage and non-wage operating expenditure, Cost-Income Ratio (CIR) and gross NPA for scheduled commercial private sector banks and scheduled/non-scheduled Urban Cooperative Banks (UCBs) in India. The analysis shows that NIM has a significant positive impact on the profitability of banks. For scheduled commercial private sector banks, the gross NPA has the most profound negative impact on their profitability. For UCBs, the most significant negative impact comes from wage CIR. For none of the banks, credit delinquency increases with a higher NIM. While operating cost per rupee of assets is seen at an elevated level for banks with a higher NIM, the impact of the higher cost is more than offset by the increased income, and hence, the paper shows that NIM is one of the important determinants of bank's profitability and a higher NIM does not necessarily cause cost complacency and credit delinquency.
Microcredit-Backed Securitization (MBS): A Win-Win Scenario for MFIs and Investors
Securitization is an off-balance sheet tool that facilitates capital relief. However, in India, securitization originated three decades ago, yet, the market is still in its development stage. In this backdrop, this paper examines an innovative existing structured finance model-securitization as an emerging alternative for sourcing funds to tide over the liquidity and funding constraints in MFI sector. Currently, MFIs rely on lumpy cash flows from banks during Q3 or Q4, when banks are trying to fulfil their CAR needs. However, the structured instruments facilitate MFIs to access the capital markets to match their funding and liquidity requirements. The paper outlines the concept of structured finance and emergence of new asset classes, application of structured instruments in the area of microfinance, securitization models-Direct Assignment (DA) and Pass Through Certificate (PTC)-in MFI sector with insights from industry experts. It also examines the advantages to both originators and investors and suggests the prerequisites for MFIs contemplating approaching these markets.
Inner Workings of Collateral-Based Stablecoins and Its Implications
While early cryptoassets such as Bitcoin have reputation for high price fluctuation and limited scalability, stablecoin, a new class of cryptographic token, emerged with the purpose of mitigating price volatility. What distinguishes stablecoin from preexisting cryptocurrency is its use of collateral and use of specific pegging mechanism to mitigate volatility risks. The paper sheds light on the inner workings of stablecoins by analyzing stabilizing property with various aspects of collateral mix as well as pegging mechanism. Specifically, it evaluates initiatives to effectively utilize gold and government bonds as combinatorial collateral.