With the economy in recession the banks have to make the difficult choice of choosing between investing in risky and non-risky assets.Since the slow down of the Indian economy is now universally agreed upon, it is useful to consider its challenges to the domestic banking system under two broad heads: its implications to the financial results of banks and the options available to them to overcome the challenges.

The slow down and the policy response (the slashing of the Cash Reserve Ratio by an unprecedented 200 basis point and the reduction of 50 basis points in the Bank Rate) have far reaching implications to the finances of banks. The accrual of deposits tends to increase the total interest payment outgo, even if the rates on deposits are reduced. Moreover, such reduction is possible only on fresh deposits. Another constraint is that banks should offer competitive rates on the deposits to keep their market share in the total financial savings lest the funds would flow to alternative avenues.

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