Narrow banking is defined as investing the additional Deposits raised from Public in safe bonds and regular interest paid Debentures of reputed companies. So, some income will come and NPAs also reduce in future. Though the interest rate is small in bonds it is an assured return.
Examples of Narrow Banking
As per RBI norms, Banking Acts have been refined several times. 18% of deposits raised only to be invested as Statutory Liquidity Ratio (SLR) in Govt Bonds and 3% to be kept with RBI as Cash Reserve Ratio (CRR).
That means 18% to be used for Bonds purchase as SLR and 3% with RBI. So remaining 79% to be used for Loans sanction.
In all banks, balance sheets Cash on hand & With RBI is shown clearly in Assets side so 3% CRR or even more is maintained. So out of which, 18% is to be used for investments.
Let us see some of the Leading Banks Deposits and Investment as per Audited Balance Sheet on March 31, 2020.
Union Bank of India
Deposits Rs.4.50 lakh crore, Investment Rs.1.52 lakh crore that means 33.81%. After the merger of Corporation Bank and Andhra Bank (on 01-4-2020) also on September 30, 2020, Deposits were Rs.8.86 lakh crore and investment of Rs.3.24 lakh crore at 36.6%.
Deposits as on March 31, 2020, were Rs.6.25 lakh crore and investment Rs.1.76 lakh crore at 28.18%. After merger of Syndicate Bank (on 01-4-2020) deposits on September 30, 2020, were Rs.9.48 lakh crore and investment was Rs.2.65 lakh crore at 27.95%
On 31-3-2020 the deposits were Rs.2.60 lakh crore and investment was Rs.0.81 lakh crore at 31.2%. After the merger of Allahabad Bank (on 01-4-2020) the deposits on 30-6-2020 were Rs.4.89 lakh crore and investment was Rs.1.61 lakh crore at 33.02%.
State Bank of India
Deposits on 31-3-2020 were Rs.32.41 lakh crore and investment at Rs.10.46 lakh crore at 32.20%. The same ratio is applicable on September 30, 2020, also.
Bank of Baroda (Mergered into Dena Bank on 01-4-2019)
On March 31, 2020, deposits were Rs.9.45 lakh crore and investment Rs.2.74 lakh crore at 28.9%
On March 31, 2020, the deposits were Rs.11.47 lakh crore and investment Rs.3.91 lakh crore at 34.4%. This bank maintained the Second position in deposits and advances even after the mega-merger of Banks.
On March 31, 2020, the deposits were Rs.7.70 lakh crore and investment Rs.2.49 lakh crore at 32.3%
Now from the above data, we can understand that the incremental increase in deposits is going majorly towards investment in Govt Bonds. Hence people are approaching private financial companies, Like Reliance capital, Bajaj finance, Birla Finance, Tata Capital, Gold loan companies and NBFCs.
Doubt may arise how ICICI Bank, Axis Bank, and HDFC Bank are getting good profits and growth in business. These private banks are getting borrowing also from RBI and some private funds at a reasonable rate to meet at least 12% deposits for SLR investment so that Credit Deposit Ratio ( CDR) is above 80% to 85% to get good retail loans and thereby profits.
So the Fiscal Deficit is reducing the profitability heavily rather than NPAs. In the disguise of NPAs actual culprit is an investment of 30% of deposit in Govt Bonds at cheaper rates.
If the fiscal deficit is not controlled in the coming years to say 3% of GDP banks will never post good profits, especially Govt banks. Banks are not Credit Shy only Fiscal Deficit is affecting the bankers.
If banks invest about 18 to 20% in bonds then more loans can be given to the customers leading to huge profits.