The Reserve Bank of India’s (RBI’s) move to lower the reverse repo rate by 115 basis points (bps) since 27 March, nudging banks to lend to “productive sectors" does not seem to have worked. Non-banking financial companies (NBFCs) continue to face a funds crunch as commercial banks keep parking more money with the central bank’s reverse repo window.
The reverse repo is the rate at which RBI borrows from commercial banks and is an important monetary policy tool aimed at controlling system liquidity.
The first reverse repo cut happened on 27 March and the next on 17 April. However, despite these steep cuts, banks have parked ₹7.21 trillion on 23 April in the fixed rate reverse repo (at an interest rate of 3.75%), compared with ₹7.09 trillion on 17 April (3.75%) and ₹4.43 trillion on 27 March at 4%.
The reverse repo rate was reduced to make it relatively unattractive for banks to passively deposit funds with RBI, according to the central bank’s monetary policy report for April.
Most NBFCs have allowed a moratorium to their borrowers but have not received the same from lenders.
NBFCs, which are still to get a uniform moratorium from banks are thus in dire need of liquidity. Experts believe though the sector’s ability to withstand a liquidity crunch is better than it was post the Infrastructure Leasing and Financial Services crisis in September 2018, the covid-19 pandemic has led to a decline in collections from borrowers.
The outlook for NBFCs and housing finance companies (HFCs) has turned negative because of the coronavirus outbreak, Care Ratings said in a 17 April report. “The sector, which grappled with liability side disruptions, could see another wave of challenges, this time in the form of asset quality. Amid these, funding challenges could mount again as banks become more selective in extending credit," the report said.
Banks are perhaps waiting for the government to make some sort of announcement of backing credit flow from banks to non-bank financiers, Umesh Revankar, chief executive, Shriram Transport Finance, said over phone. “My sense is that lenders expect the government to announce a credit guarantee scheme for certain sectors, including the NBFC sector. Clarity from the government will be helpful to restart the flow of credit," he said.
Data from RBI, compiled by Bloomberg, showed that the banking system liquidity has been in surplus mode in March and so far in April. The largest surplus was on 18 and 19 April at ₹7.32 trillion while the lowest point was on 16 March at ₹2.91 trillion.
The excess liquidity is because banks are seeing lower credit growth than the growth in deposits, said Sameer Narang, chief economist, Bank of Baroda.
“Whenever that happens, banks will have excess liquidity. The same thing happened during demonetization as well when a lot of currency came back to banks as deposits. Even then the money was getting parked with RBI," said Narang.
Having burnt their fingers in the last cycle of bad loans, banks are wary of lending not only to NBFCs but also several others. Non-food credit growth stood at 6% for the fortnight ended 27 March, compared with 13.3% in the same period last year.
The government had in November 2016 banned currency notes of ₹1,000 and ₹500. The total deposits in the banking system stood at ₹135.71 trillion, of which ₹110.6 trillion was in term deposits and the rest in demand deposits, showed RBI data.
Meanwhile, banks on Thursday bid for and borrowed ₹12,850 crore or a little more than half of what was on offer from the Reserve Bank’s first targeted long-term repo operation (TLTRO) 2.0 window.
This once again showed their reluctance to lend to the non-bank lenders.