Reserve Bank of India’s Deputy Governor Swaminathan Janakiraman on Thursday said commercial banks in India are not spending their entire IT budget, referring to recent instances of unscheduled downtimes inconveniencing several customers. Swaminathan was speaking at the SBI Economic Conclave.

The Deputy Governor also cautioned banks on interest rate risks of their books since a reversal in the interest rate cycle could put pressure on their margins and profitability.

“Recently, there have been a few incidents of unscheduled downtimes inconveniencing several customers. It is also observed that many banks have not been spending fully the budget earmarked for the procurement of IT systems and IT security systems,” Swaminathan said.

He said banks have to proactively commit adequate resources for augmenting their IT infrastructure, commensurate with their business plans and also monitor them for their continued availability and stability.

The Deputy Governor said capital adequacy ratios of banks were at an impressive 16.79 per cent as on September 30, 2023, and the Gross Non-Performing Assets (GNPA) at 3.25 per cent were at a decadal low with Net NPAs at 0.76 per cent.
He observed that the banks have become more resilient now as compared to five years ago.

“The uptrend in profitability has continued into its fourth consecutive year with Return on Assets at a healthy 1.3 per cent and Return on Equity at 12.5 per cent. As compared to 2018, when 12 banks were placed under the Prompt Corrective Action (PCA) framework, today no Scheduled Commercial Banks (SCB) is under PCA,” he said.

Going ahead, he emphasised the importance of banks in managing interest rate risks from trading as well as banking books.

“Increasing NIMs that banks are presently enjoying may not be sustained in the future when the interest rate cycle reverses, whenever that happens in the future. External benchmark linked loans will be repriced much faster than deposits contracted during the peak of the interest rate cycle resulting in pressure on net interest margins (NIMs)and eventually profitability,” he said.

On the liabilities side, he said that excessive reliance on bulk deposits should be avoided as these are more sensitive to interest rate movements and perpetuate concentration risk while also eroding earnings.

“We are still coming across instances of non-compliance with these (digital lending) guidelines, requiring us to take appropriate supervisory action including imposition of business restrictions, where warranted. I would therefore urge the industry to review and strengthen its compliance with all regulatory instructions on customer protection and grievance redress,” he said.