Liquidity crunch hits banks

The Reserve Bank of India (RBI) had five months ago cautioned banks that it was undesirable on their part to chase liquidity at expensive interest rates. Banks, which over-leveraged themselves to meet high credit demand, are now finding tightness disrupting their operations, albeit marginal.

Lendable resources have become scarce compelling some of the banks to borrow money for up to one year on interest rates as high as 12 per cent. These banks are so desperate for funds since yesterday that the overnight call rates have touched near decade highs.

The weighted average call money rate shot up to 75 per cent today in intra-day trade, after opening at 45 per cent. It closed at 40 per cent today. The call money volume at Rs 14,545 crore was at the same level as yesterday, but the weighted average call rate today was 52.22 per cent against 20.64 per cent yesterday.

After the monetary policy review in October, Y V Reddy, RBI governor, had said "What we are saying is that at the moment we have acted to clearly indicate that if there are liquidity constraints in the system, you (banks) should be prepared for paying a higher price. And if you (banks) can avoid that (expensive debt), (then) it is desirable."

He had also warned of an imbalance if deposit mobilisation failed to match credit growth rates.

Credit continues to grow at nearly 30 per cent year on year as on March 10, while deposit growth has slightly accelerated to 24.8 per cent year on year compared to 17 per cent a year earlier. However, the incremental credit-deposit ratio is still at a high of around 88 per cent, though lower than over 100 per cent last year.

DIFFERENT TAKES

Liquidity is pretty tight because of the massive tax outflow worth Rs 45,000-50,000 crore. Earlier, under MSS and scheduled bond auction also Rs 13,000 crore. Acute liquidity crisis is causing banks to sell assets or forex reserves, resulting the appreciation of the rupee at 43.49 per dollar. Asset prices have also moved up. Last year also there was a similar situation. This year, amount of tax advances is larger. Also from March 24 to 31, the government's balances with the RBI reduced by Rs 4,000 crore. We expect the government to spend more in the last week. Normally in April, liquidity substantially improves. However, if the RBI looks at mopping up surplus liquidity to manage inflation, liquidity may not be very comfortable but not as tight as today. So it depends on two factors - government expenditure and RBI mopping up liquidity. Banks for whom credit growth has been far higher than deposit mobilisation, leading to overdependence on borrowings. Since borrowings are very expensive.

"" Arun Kaul
GM - treasury, Punjab National Bank

Liquidity will ease to an extent in a week as the government is expected to start spending. Some skewness in distribution of liquidity is also likely to ease. Call rates should come down to 9-10 per cent levels in the next week. There will be some impact on banks' bottom lines but not significant.

"" Ashish Parthasarthy
Head of trading, HDFC Bank

Liquidity is very tight at the moment. There have been no signs of liquidity infusion in the market. Things are expected to improve gradually over the next few days as the government should start spending any moment now. But it is difficult to say for sure when the situation will ease. Actual shortage of funds will affect net interest income of banks. The impact will be marginal if the situation corrects over the next couple of days. Otherwise there will be a longer-term impact.

""Partho Mukherjee
Head - treasury, UTI Bank

The tight liquidity condition is expected to prevail only till this weekend. Advance tax outflows and banks' raising funds to manage asset liability mismatch are the reasons. The situation is expected to improve next week. Government departments are likely to release funds for expenditure before close of the financial year. It will ease pressure on liquidity. We were expecting pressure on liquidity but not to this extent. But BoI has comfortable resources base and does not have to be in market to borrow aggressively. Any impact on balance sheet of high cost borrowings for banks is temporary as resources are raised for short term.

"" M Mallya
CMD, Bank of Maharashtra