Is it time to have a central depository for cash?

I REFER to the Wealth & Investing commentary by Ferlyn Tan headlined "The long-awaited comeback of the Singapore banks" (BT, Jan 6, 2021) which asserted that Singapore's banking sector is still attractive as the global economy and credit environment have largely improved from the Covid-19 shock. The author also does not expect any substantial compression in margins in 2021, especially when the three local banks are flush with liquidity, as deposits have outpaced loan growth over the past few quarters.

As the Covid-19 global pandemic drags on, banks have turned risk averse and cut back on lending, unless the government shares in the lending risks and/or guarantees a significant portion of the loans. The banks seem to have the best of both worlds, when they can price the loans based on borrower risks, while hedged against bad loans from the government should those loan defaults occur.

The profitability of a bank is determined by its net interest margin (NIM), which is the difference between what it earns from loans and what it pays on deposits. Even though the NIM of the local banks are under 2 per cent, the three local banks are making billions of dollars each quarter. Banks are paying peanuts to depositors for the cost of funds to finance higher-yielding loans, and continue to report impressive return on equity and pay billions in dividends to shareholders, Covid-19 notwithstanding