Borrowers are coming in droves, and banks are getting desperate

Data from RBI showed that government cash balances with the central bank is about  ₹3.8 trillion, money when spent will flow into the banking system and add to the liquidity. (HT_PRINT)
Data from RBI showed that government cash balances with the central bank is about 3.8 trillion, money when spent will flow into the banking system and add to the liquidity. (HT_PRINT)


  • Bankers said they are hoping the liquidity situation improves in the coming days with the expected pickup in government spending.

Mumbai: The frenzy for credit is forcing banks to issue costly certificates of deposit and tap a central bank window for money, at a time of scarce liquidity and weak deposit growth.

The government's cash balances with the central bank stood at about 3.8 trillion on Thursday, and bankers hope the situation will improve when government spending picks up, and money finds its way into the banking system.

Liquidity deficit stood at 2.6 trillion as on 22 February, slightly lower than 2.8 trillion on 21 February, as per data from Bloomberg, but has nonetheless stayed in deficit since 8 December.

“Because credit offtake is quite strong, banks are managing the shortfall in deposits with short-term borrowings," said Arun Bansal, executive director, IDBI Bank. "Banks are dipping into their SLR securities—government securities and other sovereign papers—and given that everyone is sitting on surplus SLR, it can be used in such situations to borrow funds through tri-party repos at 6.3-6.8% and at 6.75% from the marginal standing facility (MSF) window," Bansal added.

Banks tap the central bank's MSF window when money turns scarce in the interbank or call market. The weighted average call rate stood at 6.55% as on 22 February, cooling off from the 6.7% levels seen earlier this month.

Banks have raised deposit rates to attract funds, but net inflows have not kept pace with the kind of credit demand banks are witnessing. While deposit growth stood at 13.6% year-on-year (y-o-y) as of 9 February, growth in non-food credit was at 20.4% y-o-y in the same period.

Bansal said it is cheaper to borrow from MSF than issue CDs. “Bulk deposit and CD rates have gone quite high. In the shortest tenure of bulk deposits — 46 days to 91 days — the rates are at 7.20-7.35%; three-month CDs ending in March are trading at 7.80-7.90%," said Bansal.

According to a banker at a large state-owned bank, lenders are trying to raise some short-term funds and hoping that when inflation is under control, RBI will take care of the liquidity. Demand for CDs has shot up, he said. In fact, banks have issued CDs worth 44,657 crore in the fortnight ended 9 February, showed RBI data. These were issued in the interest rate range of 7.23-8.02%, as compared to 20,013 crore issued in the previous fortnight at 7.07-8.02%.

“Indian banking liquidity remains constrained in Q4 FY24 even though government spending has come back, but RBI remains hawkish," analysts at Goldman Sachs said in a note on Friday. “Recent monetary stance suggests little inclination from the RBI to relax system liquidity through repo operations, as it aims to keep the overnight rate closer to the repo rate," they said.

However, the analysts said that as spending by the government is expected to pick up ahead of the elections, RBI expects the excess contraction in system liquidity to correct by itself in the near term.

Others said that deficit is likely to continue till the end of March, when it would improve on increased spending.

“Till 15 March, there will be advance tax payments and there might be more variable rate repo auctions from the RBI. By the end of the year, the government would also be in a hurry to exhaust its budgets and start spending," said Madan Sabnavis, chief economist, Bank of Baroda, adding that once the government cash balances come down, liquidity will possibly improve.

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