Brokerage house Morgan Stanley feels the latest reduction in marginal standing facility (MSF) still does not fix some of the structural issues related to funding for banks.
MSF is a window through which banks can borrow short term funds from RBI. The rate was hiked to 10.25 percent in July, and has now been lowered to 9 percent in two phases.
"Deposit growth continues to lag credit growth meaningfully. This has taken the system loan to deposit ratio to unsustainable levels (currently at 78 percent)," said the Morgan Stanley note to clients.
Also Read: See benefit of MSF rate cut over long period: Bankers
According to Morgan Stanley analysts Anil Agarwal, Sumeet Kariwala, and Subramanian Iyer, banks should ideally hike rates so as to attract depositors, even if it means slower loan growth.
"What is needed in India is a slowdown in banking credit book growth, not acceleration. Loan growth at around 18 percent in a slowing economy is tough to sustain. But banks seem to be looking at growing faster," the Morgan Stanley note says.
The trio is not enthused about the government's proposal that banks offer low cost loans to consumers for the festive season. According to them, this will first affect the net interest margins and soon after, the asset quality.
Also, banks needs to fix their balance sheet problems (unsustainable loan to deposit ratio and bad loans) to regain favour with investors, says Morgan Stanley.
"Banks need to recognize bad loans rather than push them out. Till banks do this, these stocks will remain trading stocks," the note says.
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