The collapse of UK’s morgtage lender, Northern Rock, in 2007, due to dependence on wholesale deposits has caused concerns over Indian commercial banks’ substantial increase in reliance on volatile deposits and other funding sources in the last couple of years. Northern Rock failed as wholesale funding, the source of 80 per cent of its resources, disappeared in the wake of the global credit squeeze caused by the US sub-prime mortgage crisis.
“There is a need for banks to shore up their core deposits base,” according to Rakesh Mohan, deputy governor, RBI and chairman of the committee on financial sector assessment (CFSA). A study by CFSA revealed that the ratio of volatile liabilities to total assets has increased from 53.5 per cent in March 2005 to 73.1 per cent in March 2008, an indicator of banks high dependence on corporate deposits for growing their assets book. Banks like ICICI Bank, HDFC Bank and Yes Bank have a very high dependence on corporate deposits.
Corporate deposits constitute about 90 per cent of Yes Bank’s funding sources, about 50 per cent of ICICI Bank and nearly 40 per cent of HDFC Bank, according to banking sources.
The ratio of core deposits including net worth to total assets works out to 49.3 per cent in March 2008, down from 53.8 per cent in March 2005. “We have to be more vigilant in future considering what has happened globally,” said Usha Thorat, deputy governor, RBI.