Banks not pricing in credit risk fairly: SBI report

Banks are not adequately pricing in credit risk as the liquidity condition tightens and interest rates remain high, said State Bank of India in a research report.

Over the last few months, the Reserve Bank of India (RBI) has front-loaded rate hikes and calibrated excess liquidity in the banking system as it seeks to rein in elevated inflation.

While the liquidity conditions have eased in November on the back of the government accelerating spending, the average net durable liquidity injected into the banking system has dropped to Rs 3 trillion from Rs 8.3 trillion in April, SBI research said in its latest ‘Ecowrap’ report.

“Even as the banking system has moved closer to a calibrated liquidity coupled with higher signaling rates, one thing has still not changed; that is credit risk not getting adequately priced in, even as credit demand is at decadal highs and liquidity remains significantly downsized,” said the report by India’s largest lender.

“A back of envelope estimate suggests that the core funding cost of the banking system is currently at around 6.2%, while the reverse repo rate is at 5.65%. No wonder, banks are currently engaged in a fierce war to raise deposits, with rates being offered up to 7.75% in select circumstances,” it said.

RBI Governor Shaktikanta Das said earlier this year that banks cannot “perennially” rely on the central bank’s money to support credit offtake and they must mobilise their own funds and resources.