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As system liquidity moderates and deposit growth remains weaker than credit pickup, banks have begun to dip into their excess stock of regulatory buffers of liquid holdings.

While banks reported non-food credit growth of 16.7% on 9 September, deposit growth lagged at 9.5%. The scenario has been similar for the last few fortnights, and demand for credit, is led by retail and supported, to an extent, by corporates. The hike in RBI repo rate has been passed on to the borrower; however, banks have not shown similar alacrity in revising deposit rates, apart from a few festive offers. Surplus liquidity in the banking system, as measured by the average daily absorptions under the liquidity adjustment facility (LAF), moderated to 2.3 trillion between August and 28 September, from 3.8 trillion during June-July.

“Many banks are holding excess statutory liquidity ratio (SLR) and excess cash reserve ratio (CRR) and some of them have started dipping into them because they need the cash to support and sustain their lending operations," said RBI governor Shaktikanta Das.

Meanwhile, the government raised rates on certain small savings schemes on Thursday by up to 30 basis points (bps) for the December quarter. Experts said the reduction in surplus liquidity has ensured better monetary transmission and believe that deposit rate hikes are in the offing. “We believe that the large over 6% differential between the increased credit and deposit growth is clearly unsustainable and hence, we expect a hike in deposit rates by banks up to 50-150 bps in the second half of FY23," said Suman Chowdhury, chief analytical officer, Acuité Ratings & Research. Governor Das said the temporary moderation of surplus liquidity has to be seen in the context of the potential liquidity in the system arising from the expected pick-up in government spending in the second half of the year.

“If you take everything into account, the system liquidity is in the order of about 5 trillion," he said. In October last year, RBI had said that the fortnightly main liquidity operation conducted through 14-day variable rate reverse repo (VRRR) auctions may be complemented with 28-day VRRR auctions, depending upon the liquidity conditions. On Friday, the central bank announced that given the moderation in surplus liquidity, it will merge the 28-day VRRR with the fortnightly 14-day main auction and therefore, only 14-day VRRR auctions will be conducted. Fine-tuning operations of various maturities for absorption as well as injection of liquidity will continue as necessary, Das said. According to Kaushik Das, chief economist, India and South Asia, Deutsche Bank, going forward, RBI will announce term variable repo rate auctions, to fine tune liquidity, which will result in the Mumbai Interbank Offer Rate (Mibor) and the call money rate aligning with the repo rate.

ABOUT THE AUTHOR

Shayan Ghosh

Shayan Ghosh is a national writer at Mint reporting on traditional banks and shadow banks. He has over a decade of experience in financial journalism. Based in Mint’s Mumbai bureau since 2018, he tracks interest rate movements and its impact on companies and the broader economy. His interests also include the distressed debt market, especially as India’s bankruptcy law attempts recoveries of billions worth of toxic assets.
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