Banks need to look beyond bulk deposits to fund loans: RBI

The Reserve Bank of India (RBI) Thursday said that banks must reduce their reliance on wholesale deposits to fund loans and be watchful of the risks associated with their advances and trading exposures amid interest rate fluctuations.

“Considering the dynamic nature of the interest rate risk, banks may have to address both trading and banking book risks, especially in the light of moderating net inter margins,” the RBI said in its annual report for FY24 Thursday. “On the liabilities side, it is imperative to focus on diversification of deposit sources as reliance on bulk deposits heightens sensitivity to interest rate fluctuations,” it added.

The RBI also pointed out that regulatory measures aimed at slowing consumer lending have worked.

Risk Weights

“Pre-emptive regulatory measures aimed at curbing excessive consumer lending and bank lending to non-banking finance companies (NBFCs), and investments in alternate investment funds (AIFs) are expected to contain the build-up of potential stress in balance sheets of financial intermediaries and contribute to financial stability,” said the regulator in the annual report.

The central bank also said the financial sector is sound and vibrant, supporting double-digit credit growth, backed by high capital adequacy, solid earnings, and improvements in asset quality.

The RBI also stated that it is striving to make its regulations more principle-based, activity-oriented and proportionate to the scale of systemic risk rather than entity-oriented.

In FY25, the RBI will issue guidelines on several regulatory and supervisory measures to further strengthen the financial intermediaries.

These include a comprehensive review of income recognition, asset classification and provision (IRACP) norms and the prudential framework for the resolution of stressed assets across regulated entities. The regulator will also issue final guidelines on project financing and initiate measures to ‘move towards adopting a forward-looking expected credit loss (ECL) approach’, according to the RBI annual report.

Stressed Assets

In FY25, the regulator will likely issue final guidelines on securitising the stressed assets framework.

The central bank will also conduct a comprehensive review of the regulatory instructions on interest rates on advances across banks and finance companies, as stated in the annual report.

The RBI stated that frequent and wider interactions with the supervised entities (SE) would remain critical to enhancing the effectiveness of supervisory intervention. Strengthening the governance and assurance functions of the SEs would continue to be a priority for the RBI.

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