Non-deposit resources on the rise

REPORT ON TREND AND PROGRESS OF BANKING IN INDIA 2004-05

The Reserve Bank of India (RBI) has pointed out that the high growth in non-deposit resources of banks such as net owned funds (capital and reserves) and borrowings was a significant development during 2004-05.

To meet the increased demand for credit, banks increased recourse to non-deposit resources and restricted fresh investment in government securities.

According to the RBI Report on Trends and Progress in Banking, banks raised Rs 7,444 crore from the domestic equity market and Rs 1,473 crore by way of depository receipts (GDR) in the international market during 2004-05. Of the total increase in borrowings of Rs 22,749 crore, 52.5 per cent (Rs 11,941 crore) was in foreign currency.

The RBI stated that the increase in reserves reflected the impact of premium charged on equity issues and rise in retained earnings.

It explained that increase in borrowings could be attributed to the increase in debt issues in the domestic capital market and largely owing to the hike in foreign currency borrowings.

While deposits continue to be the main source of funding, the relative significance of non-deposit resources has risen. Within non-deposit resources, the share of borrowings and reserves in total liabilities have gradually increased.

Although the share of capital has declined over the years, the share of net-owned funds has gone up marginally. In order to meet the capital adequacy requirements, banks have relied mainly on retained earnings.

Banks'profitablity in recent years has improved significantly, as a result of which they are able to plough back their profits.

Two significant sources of borrowings in recent years have been subordinatd debt, issued to augment tier-II capital, and the increase in foreign currency borrowings.

The sharp expansion in foreign currency borrowings has been owing to various measures of liberalisation, relating to capital account for facilitating residents' foreign currency requirement for productive purposes.