Some key metrics may be headed for a sharp U-turn this year


Hope and expectations get conditioned by recent events. Consequently, behaviour and actions become solely driven by such recency bias. The New Year 2023 is one in which success in terms of outcomes will depend on trying to shake off this recency bias and look at things through a new lens. Why do I say so?

One of my favourite quotes this year has been, ‘Things that never happened before happen all the time’. The events in the recent past such as demonetisation, the pandemic, and the Russia-Ukraine conflict are testimony to this.

The behaviour of various stakeholders and its impact on the overall system shaped profitability, balance sheets and the decisions of all participants. More particularly, central banks have been agile and quick to provide a safety net for the economy. Their objective was to ensure that casualties are minimised, and to guarantee that systemic risk is contained.

The liquidity support provided post-pandemic by all global central banks has been of a magnitude not seen till now (another never before event!). It has lingered for a long period that has possibly lulled participants to believe that this copious liquidity is a ‘business as usual’ scenario and any dent to economic growth will cause central banks to ‘pivot’ to the rescue.

With inflation being the primary objective, central bank pivots are not on the radar for 2023 and the withdrawal of liquidity will continue through the year, however painful it may be.

For India, banking system liquidity being in deficit is a stated baseline scenario for the RBI under normal conditions. In my view, this should happen earlier than what the market seems to be anticipating.

So, what are the various recency biases we need to shake off as this plays out?
Let’s look at some of the metrics that can take a sharp U-Turn in the coming year. While the focus of the market has been on the credit growth and the asset side of the balance sheet, the metrics that would likely trip their performance are on the liability side. Here are some of them:

CASA [current account savings account] ratio to trend down: With the effect of the pandemic wearing off and the central bank withdrawing liquidity, growth rates of CASA are likely to trend lower. The spike in term deposit rates have further steam to power higher, making growth in CASA more challenging.

With demand for credit picking up, be prepared for CASA ratios to break their increasing trend.

Bulk deposits proportion to increase: As CASA and retail term deposit growth stalls, banks will increasingly resort to price sensitive bulk deposits. The impending mega merger in the banking system and consequent balance sheet management of the merged entity will keep demand and price of bulk deposits at a much higher level than in the recent past. Barring innovative classification of deposits, one should be prepared for retail term deposit share to come down in overall deposits, another U-turn in metrics.

CD issuances back in favour: Along with bulk deposits, issuances of certificated of deposits (CDs) by banks will explode as banks try to front-run each other in their quest for deposits. Already the 1-year CD – T-Bill spreads are at the higher end of the normal range and at levels not seen for the last many years. There is likely to be a breakout of these ranges and such spreads are likely headed to ‘never before’ levels.

EBLR lending a drag for banks: With repo rates likely to be stickier than cost of funds in the coming year, lending linked to external benchmarks are going to be a drag on NIM [net interest margins] for banks as deposits reprice higher. In my opinion, the incremental lending for the last two months, if funded with fully loaded cost of deposits borrowed during those months, would not be margin accretive.

AAA spreads to move higher: As CD issuances increase and their yields trend up, all corporate issuances will correspondingly get priced at a higher level. The dream run of extremely cheap money for AAA corporates through CPs and bonds is over and credit spreads for such issuances are likely to be elevated, and much above the normal range seen over the last many years. To clarify, the increase in credit spread is more a function of banks crowding them out of capital markets and not because of any deterioration in their credit profile.

NBFCs have a tough year ahead: NBFCs have weathered the post-ILFS, Covid scenario with a mix of assignment, PTCs, co-lending and TLTRO (targeted longer-term refiancing options) funding. As organic credit growth of banks gathers steam, their

on sourcing of credit through NBFCs is going to decrease. With the MFs still wary of NBFC lending, top-line growth for NBFCs should become increasingly more challenging.This list can go on. While the above have implications for players in these segments, their systemic impact can be material, both for the real economy and the financial system. For now, let’s shake off the recency bias in our expectations and be prepared to tread a path not trodden over the last many years.

(Author is Non-Executive Chairman of




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