During these troubled times when all the central banks are coming out with all sorts of stimulus packages to give a fillip to their respective economies, one is tempted to ask

Is the time ripe for Lazy Banking?

One might not have heard about this phenomena off late but it has been rigourously practiced by Indian commercial banks during 1999-2002 period. So let’s first have a look at this evocative phrase which was coined by Mr. Rakesh Mohan, former deputy governor, RBI.

Lazy Banking refers to the phenomena of investment by commercial banks in sovereign bonds in declining interest rate regime. As interest rates decline, prices of bonds rise (normally there is inverse relationship between the price and interest rates) resulting in huge profits for banks. And this investment comes at the expense of funding commercial activity.

 During 1999-2002 era, commercial banks religiously followed Lazy Banking as RBI was aggressively cutting interest rates. At one point of time in 2002, banks were buying government bonds with a gluttonous appetite. Nearly 45 per cent of the funds at their disposal had been used to buy the securities that the government was selling to finance its deficit.

Coming back to the present times, RBI has steadily cut rates in order to push the economy forward hence prices of bonds would rise. Coupled with declining interest rates, commercial banks are wary of funding business activities during these uncertain times on pretext of rising NPAs. Therefore the situation is extremely inviting for banks to indulge in Lazy Banking which may not be a good thing for Indian businesses as they are already facing liquidity crunch.

But I am sure RBI will make sure that the situation does not get too far out of hands and businesses could breathe out of this slowdown.

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