Banks turn net borrowers at RBI's liquidity window

Two extra LAF sessions on the cards.

Showing signs of tight liquidity at the end of the financial year, banks turned net borrowers at the Reserve Bank of India’s (RBI’s) liquidity adjustment facility (LAF) on Monday.

For the first time in the current financial year (2009-10), the amount borrowed from the RBI repo window exceeded the amount banks parked at the reverse repo window. While one bank borrowed Rs 900 crore for a day, four banks placed a demand for Rs 445 crore, RBI said in a statement.

Bankers said the strain on resources was due to temporary mismatch in the system and did not reflect shortage of funds. The average amount parked with RBI on a daily basis has been declining significantly since the beginning of the month. The market expects pressure on resources in the remaining two days of the financial year.

“Liquidity has been shrinking and credit growth has been good. Disbursements have picked up significantly, which is why liquidity has shrunk,” said the head of treasury with a Mumbai-based large public sector bank.

According to data released by RBI, scheduled commercial banks, including regional rural banks, recorded 16.04 per cent credit growth at the end of March 12 on a year-on-year basis. This is above RBI’s projection of 16 per cent credit growth in this financial year.

Meanwhile, the central bank said it would conduct additional repo and reverse repo operations under LAF on March 30 and 31 to meet the year-end liquidity requirements.

The inter-bank overnight market did not show signs of pressure, as call rates remained in range of 2.75-4.65 per cent. Total volume in the call segment was Rs 11,607 crore. It was Rs 22,356 crore in the repo segment and Rs 51,460 crore in the collateralised borrowing and lending segment, according to Clearing Corporation of India data.

Pointing to immediate concerns, a dealer with an associate banking unit of State Bank of India said some banks were keeping ready cash to manage till April 5, which would be the first full working day of the new financial year (2010-11).

Banks have begun unwinding large investments in mutual fund (MF) schemes, especially liquid funds, to avoid higher capital charge at the end of the financial year. Their outstanding investment in MFs stood at Rs 108,516 crore as on February 26.