Microfinance Practice: RE: [MFP] Importance of monitoring credit to deposit ratio to understand how money is moving and why

Hi Del and Malcolm,

My overall knowledge is limited and I too am understand this better – links between macro money circulation and micro-finance/ financial inclusion. It is known that at the macroeconomic levels, almost all emerging economies are capital/ investment hungry; and some are able to borrow from outside (private sources or multilateral capital from likes of IMF). But internal savings and deposits remain an important source for larger investments, which I deduce, must take portion of those resources away from micro and meso economy. Here is an article that throws some light on this from Africa perspective. Analysis in southern and eastern Africa clearly suggest that even small enterprises are unable to borrow from banking system, leave alone micro and informal ones. Perhaps, governments peg their T-bill (treasury bills or securities) returns high enough to attract the local capital/ savings.

My assumption is, this must have an impact on the overall capital circulation and behavior in the local economies, especially the micro-economy; which perhaps otherwise rely mostly on equity and reinvestment of profits. If this hypotheses is even half-accurate, then in our discussion on financial inclusion, be it savings or loans, this may be an important factor to consider and analyze; and how this differs from country to country. In India, the policy of priority sector lending (40% of total portfolio for all Indian banks) is an instrument that Government and RBI has used (SHG and MF lending are classified as priority sector, but constitute a small part).

On a side-note, one of the arguments made by members owned micro-finance methodologies (VSLAs, Coops, even SHGs) is that these models, in theory, keep the capital circulating in the local economies. Perhaps, same is true for MFIs too. In my town of Antigonish, the Bergengren Credit Union lends app $ 185 million of $ 210 million deposits and rest has to kept as reserve as per banking norms.

But back to the original point; CD ratio is perhaps an important indicator to watch at the systemic level for us in MF/ Financial Inclusion. And, even though individual institutions may vary their deposit mobilization and credit policies, depending upon their access to capital and risk taking capacity; what perhaps matters more is the overall picture. I am probably saying the obvious. Might be worth doing a small desk study, or maybe others in this network have relevant papers or resources to point to.

Best,

Anuj

From: MicrofinancePractice@yahoogroups.com [mailto:MicrofinancePractice@yahoogroups.com] On Behalf Of dfitchett
Sent: Wednesday, February 05, 2014 5:35 PM
To: MicrofinancePractice@yahoogroups.com
Subject: Re: [MFP] Importance of monitoring credit to deposit ratio to understand how money is moving and why

Anuj,

You have brought up what may be a recurring problem in many LDC banking sectors. When I looked at several CFA Franc countries, I also observed the apparent propensity for local banks to favor purchasing Government debt paper (or lending to a few export-oriented enterprises with close European ties). It may be that to an important extent this behavior is promoted by bank regulators (based at the BCEAO or BEAC) which may rate government paper as more secure than the lending to private firms (especially locally based enterprises). In some cases it may be that bank regulators have been schooled very conservatively, and external reviews discourage much such initiative. (One should appreciate the problems associated with some of the continent's commercial bank "restructuring" exercises, but one should not confuse absolute "risk avoidance" with prudent "risk management".)

On one occasion I asked a local food processor why she couldn't take a USAID or UNICEF contract (for locally preparing and packaging a food supplement) to a local bank as the security for a bank loan to finance the activity. I subsequently asked the same question of a local banker. The practice seemed to be considered unorthodox. Perhaps donor agencies could make more of an effort to use their local procurement activities to underpin more "bankability" for local entrepreneurs.

Del

----- Original Message -----
From: Anuj Jain
To: MicrofinancePractice@yahoogroups.com
Sent: Wednesday, February 05, 2014 3:44 PM
Subject: [MFP] Importance of monitoring credit to deposit ratio to understand how money is moving and why

Hi all,
I have been trying to understand and monitor the importance of ‘credit to deposit’ ratio in any banking system, to see the link between money movement and economy, and how that relates to microfinance. In India, these ratios are regularly published by the reserve bank of India, and tell us about urban bias for lending. Here is a brief summary of a analysis on RBI website. CD Ratio in Indian Banking System
I came across this recent article from US banking system, which is equally telling. Many years ago, when I was working in Zambia, it took me some time to understand why local banks were not keen to lend to local businesses and enterprises; because the government bonds offered very high secured returns for the capital that Banks placed with them.
This post of mine got triggered by another recent article that highlighted how Donor agencies have helped large banks in developing countries to design appropriate savings products for micro-savers, including use of mobile technology and agent network system. That sounds like a great news on itself. And yet, I could not help wonder, what does that do in terms of those very banks not investing that capital in the local economies at the community level and use that capital in urban areas? Does this create a dilemma for us, and a false dichotomy between savings and credit services?
Will look forward to get your thoughts and comments.
Thanks,
Anuj

Bank reserves and the falling loan to deposit ratio at US banks
By Sober Look on 20 January 2014
Earlier this week, CNN Money ran a story on JPMorgan’s quarterly results. Instead of focusing on the earnings, the author’s (Stephen Gandel) discussed the fact that JPMorgan’s loan-to-deposit ratio (LTD) hit a new low.
The nation’s largest banks are healthier than they have been in years. Someone, apparently, forgot to tell their loan officers.
JPMorgan Chase reported its 2013 profits on Tuesday. The news was mostly good — bottom line: $18 billion – but there was one significant black spot, not just for the bank, but for the economy in general. A key lending metric, the ratio of the bank’s loans-to-deposits, hit a new low.
In 2013, JPMorgan on average lent out just 57% of its deposits. That’s down from 61% a year ago and the lowest that ratio has been in at least a decade. Back in 2004, JPMorgan’s loan-to-deposit percentage was as high as 88%.
While JPMorgan’s LTD is particularly low, the bank is by no means unique. As discussed earlier (see post), LTD in the US is at the lows not seen in decades. On an absolute basis the gap between deposits and loans is now at some $2.4 trillion and growing. This divergence seems completely unique to the post-financial crisis environment.
Red = loans and leases, Blue = deposits (all commercial banks)

As the CNN story suggests, there are a few possible explanations for this trend. Here are four of them.
1. Demand for credit remains weak due to economic uncertainty, large amounts of cash on corporate balance sheets, jittery labor markets, poor wage growth expectations, general unease with taking on debt, etc.
2. Regulatory uncertainty and tighter (and to some extent unknown) capital requirements are preventing banks from extending more credit.
3. Exceptionally low rates make some forms of lending unprofitable.
4. Banks are running unusually large excess reserve positions with the Fed that are “crowding out” lending. These reserves are effectively “loans” to the Fed paying 25bp, funded with bank deposits that pay near zero, creating riskless profits with zero regulatory capital requirement.
keep reading...

Anuj K. Jain
Sr. Coady Fellow| Microfinance and Development| COADY International Institute
St. Francis Xavier University, Antigonish, Nova Scotia, B2G 2W5| Ph: 902-872-0521