Truths, half-truths & banking statistics

Bigger the lie, greater is the probability of it being believed, Hitler’s trusted deputy, Goebbels, had famously stated.

Indian banks seem to have taken the dictum, or a variant of it, to heart — larger the fudging of figures, the better it reflects on their operational performance.

Consider what the scheduled commercial banks have achieved in a matter of seven days (March 23 through 30, 2012):
Deposit base expands by a mind-boggling Rs2.09 lakh crore
Commercial advances up by a massive Rs0.94 lakh crore
Incremental ratio of non-food credit to deposits tops 80%
Deposit growth till March 23, at 13.4 %, trailing RBI’s pared down indicative target of 17%, zooms to 17.4% by March 30. Non-food credit growth spurts from 14.4% to 16.2%, bettering the RBI’s revised indicative target of 16%

Banks under pressure to meet the targets in respect of two key parameters, deposits and advances, have simply become more “daring” during the final weeks of the last fiscal year.

Thanks to the accretion of over Rs2 lakh crore during a span of seven days ending March 30, the outstanding deposits with the banking system topped the Rs61 lakh crore mark; of this increase, demand deposits accounted for Rs1.17 lakh crore and time deposits for 0.92 lakh crore.

Much of this surge is artificial and in the early part of the current year, may flow out of the banking system. The means of mobilising them may be dubious but there is no mistaking their magnitude and impact.

The scramble for deposits led to banks garnering as much as 23% of the total deposit mobilisation during 2011-12 in a matter of a mere one week. As a result, till March 23, it appeared that, despite higher interest rates throughout the year, deposit growth might suffer a setback, missing the indicative target of the Reserve Bank of India.

Gold and debt instruments of non-banking financial companies were also competing with bank deposits. But overcoming these obstacles, the commercial banks had “managed” to achieve a turnaround in just one week and by March 30, the incremental growth of deposits had surpassed the target to stand at 17.4%.
Banks, usually tight-fisted, were also proactive when it came to lending in the final week of March 2012, by disbursing Rs0.94 crore; this constituted nearly 13% of the total advances till March 30. Again, this spurt had led to a non-food credit growth of 16.2% — up from the previous week’s 14.4% and also higher than the RBI’s indicative target of 16%.

As in the case of deposits, much of the advances during the final week of March, as indeed during the preceding few weeks, have a high degree of artificiality about them. Clients are asked to fully utilise their cash credit limits, short-term lending against deposits is encouraged and, in some instances, banks lend to clear the earlier borrowing by clients and in the process, boost their advances portfolio.

The trend of unwinding begins in the initial weeks of the new fiscal.

But, as of end-March, banks have achieved their intent - sprucing up their balance sheets by showing a spike in their deposit and advances. In fact, with one more day - March 31, 2012 - for banks to indulge in window-dressing, the incremental growth in deposits and lending during the eight days till March 31, may be even more

“ impressive” than what is revealed by data up to March 30.
The upshot of this frenzied effort to attract deposits and to lend leads to distortions.

The non-food credit to deposits ratio, which stood at 75.7% as of March 23, rose to 76.7% as of March 30. On the other hand, the incremental ratio of non-food credit to deposit, which was 93.8% till March 23, had sagged to 82.6% as of March 30, suggesting banks may take a hit in mobilising high-cost deposits as the boost to commercial lending has fallen short of this mop-up.

The larger question is, with a cash reserve ratio of 4.75% and a statutory liquidity ratio of 24%, of the demand and time deposits, how can the non-food credit to deposits ratio be so high unless banks have tapped other sources for funds.