Firms coming into repo market would hit banks' Casa source

The Reserve Bank of India’s (RBI) proposal to let listed Indian companies lend short-term money to banks could have ramifications for lenders’ current and savings account (Casa) portfolio, which banks ride on as a cheap source of funds.

And, in a liquidity-deficit scenario, call money rates can also get influenced by corporates chipping in with their surplus funds.

So far, companies could lend to banks for a minimum of seven-day tenure money. This, according to RBI, “constrains their participation”.

So, it has proposed that such companies be allowed “to lend through the repo market, without any tenor or counterparty restrictions”.

On Thursday, RBI said it was proposing that listed companies lend and borrow funds under repo for periods less than seven days, including overnight, and that unlisted companies only borrow under repos specifically against the collateral of special securities issued to them by the Government of India.

“This will help improve liquidity by adding an additional source of fund in the interbank market. Besides, this is good for the firms’ treasury management, as they can decide much more effectively what to do with their surplus fund,” said Ramkamal Samanta, vice-president, treasury, at SBI DFHI, an underwriter in government bond auctions.

However, by allowing entities in the overnight market, RBI would actually make life harder for banks. To start with, the minimum deposit basket offered by banks is of seven days. This is mainly used by companies to park their excess money; it also helps banks to shore up their deposit base at every quarter-end.

The rate of interest offered in the basket is decided by banks and corporate clients have no negotiation power.

If a company has to keep its surplus fund with banks, it necessarily had to park it in the current account of a bank earning no interest.

That is going to change. “It is creating a negotiating environment and there is no price risk, too” said Soumyajit Niyogi, associate director at India Ratings and Research.  

One sector likely to be badly hit by the move would be liquid mutual funds (MFs). If not willing to put their surplus funds in the current account of banks, where the money doesn’t earn any interest, firms typically parked their money here. A major drawback was that the money had to be deposited by 2 pm. Now, they'd be able to look beyond MFs and the current and savings accounts of banks.