The clouds of recession have set in firmly on the Indian and global markets. These dark billows have brought with them a new challenge to the banking system, which is already in trouble. The banks are trying to stay afloat, fighting the cost of VRS and ever increasing NPA. Now they have noticed that they are becoming heavy with excess liquidity. This has the potential of setting off a whirlpool of effects that would affect the bottomline of the banks and has the power to pull down the financial system deep into the depths of trouble.
The economic slowdown is now a reality domestically and internationally. What is interesting to note is that the debates on slowdown focus on the manufacturing sector and the related corporate sectors, but the banking sector has not been given its due. In the times of recession, the ultimate cumulative effect would be on the banking sector and the financial system. The shocks which emanate, end up being absorbed by the financial system. In fact, the real strength of any financial system is tested by the ability to take in the shocks.
Slowdown would affect the banking system in two ways. It would further add to the NPA's making it difficult for the banks. The corporate would also shy away borrowing from banks, as they do not need funds for the working capital and the inventories are piling up due to lack of demand. If this is coupled with a scenario where the investors have no option but to put their money in the banks, then this creates additional trouble. Since the banks do not limit the investor from putting his money with them, the banks swell with the availability of huge funds but no profitable investment avenues. As a result, the banks invest in low return government securities, which puts pressure on the margins. This can lead to negative spreads there by affecting the bottomline. If this continues for a long time, it would put a lot of pressure on the banks and the whole financial system. The already pressurized Indian banking system might find it difficult to absorb this.
|
