Liquidity Conundrum in Asian Banks

Asia and the Pacific region remain at the epicentre of global growth, contributing 70% of the world economy’s growth. Unfortunately, despite being a driving force, Asia struggles with inflation, financial vulnerabilities, and liquidity droughts due to the global economic slowdown. Rising inflation, the Russia-Ukraine war, high-interest rates, and a disbalance of demand and supply force the economy to hit rock bottom. Consequently, Asian banks are struggling with liquidity constraints even after demand expansion in 2024. According to the World Economic Forum, slowing down global economic growth will prevail, as per top Asian banks, due to a worsening financial outlook, geopolitical situation, and the risk of recession.

In the banking sector, scarce liquidity doesn’t appear promptly. Still, numerous factors shape the condition, such as high loan demand, economic downtime, default loans, decreased asset quality, turbulent financial markets, and operational issues. The global economic slowdown raises a wider profile of credit risk for Asian banks. Recently, US and European banks have faced setbacks with rising credit rates and contagion risks. A similar situation prevails in other Asian countries like China and India, where advanced economies face challenges due to increased funding costs and declining asset value. 

Another key perspective on this draining liquidity condition is a retrenchment in external funding lines, sudden deposit withdrawals, and increased external borrowing costs that constantly enlarge the risk. Additionally, real estate prices in Asia are at a peak even after a balanced market, which has put pressure on Asian bank balance sheets due to mortgage lending and loan defaults by real estate developers. For a stable Asian financial system, banks must comply with these unbound external challenges to counter growing cash demand in the market. 

Amid rising debt and high interest rates, fiscal consolidation frames a new challenge for Asian banks in drowning economic conditions. Post-COVID, the public debt level has increased, and governments are tightening budgets to stabilise debt and reduce the burden. To overcome the challenge, policymakers require sustainable challenges to strike a balance of growth in the economy. The pandemic has hardly hit Asian banks. They have already learned from past liquidity crises and taken adaptive measures like self-insurance and maintaining large stocks. However, diverse regulations in Asia-specific regions are more costly for Asian banks to comply with, especially smaller banks with limited resources. 

Moving towards the Indian banking system, they face a high liquidity deficit with limited government spending and outflow issues. In January 2023, the deficit stood at 3.34 trillion rupees ($40.18 billion), which was three times more than the starting month; the Reserve Bank of India revealed this data, showing concern about the upcoming challenges. Currently, the rate stands at 2 trillion rupees ($24 billion), with a weighted average interbank lending rate of nearly 6.75%. Indian lenders have urged the RBI to ease liquidity conditions as overnight cash rates stay above the policy rate.

“A slowing global economy and a divergent economic landscape will challenge the banking industry in 2024. It will test banks’ ability to generate income and manage costs in new ways. – Deloitte”

In 2024, apart from the economic slowdown, Asian banks are struggling with multiple disruptive forces, including reduced money supply, climate change, more assertive regulations, and geopolitical tensions. As per Deloitte’s published insights, the IMF has projected the economic growth rate for advanced economies in countries like the United States, the United Kingdom, the Euro area, Japan, and Canada to be only 1.4% in 2024. Additionally, the global inflation rate might hit 5.2% in 2024.

The latest updates showcase that Asian banks will encounter mixed challenges in 2024. These difficulties will affect the banks’ agility to generate income and manage costs like interest and operational expenses. Furthermore, the global banking industry is impacted by customer expectations of high rates accompanied by increased market competition; altogether, this will force Asian banks to offer high deposit rates to retain their customers and provide coverage for liquidity challenges. Rigid strategies and frameworks are required to comply with the prevailing challenges of higher deposit costs, lower policy rates, and constrained loan potential. 

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