Borrow at 9%, Lend at 8.5%’: Uday Kotak Predicts Banking Crisis Ahead

India’s richest banker, Uday Kotak, has issued a stark warning about the sustainability of the current banking model. In a recent post, Kotak highlighted a troubling paradox: banks are borrowing deposits at nearly 9% while lending at just 8.5%, creating a negative margin of -0.5%. This inverted spread, coupled with rising operational expenses and credit costs, poses a serious threat to the viability of the banking sector.

 

Kotak explained that wholesale deposits, which many banks are relying on due to slow retail deposit growth, come with additional costs such as the Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), deposit insurance, and priority sector lending obligations. These factors push the marginal deposit cost above 9%, while home loans continue to be issued at floating rates of 8.5%.

 

The situation is further exacerbated by tighter liquidity conditions and RBI’s recent policy rate cuts. Retail deposits have grown sluggishly, forcing banks to depend on expensive bulk deposits to meet credit demand. If this trend persists, Kotak warns that the banking business model could face irreversible damage.

 

This critical insight comes at a time when credit growth in India has slowed significantly, raising urgent questions about the future of the banking sector.

 

Source: Business Today