Liquidity Overhang May Affect Banks

The liquidity overhang in the banking system is likely to affect banks' bottom lines as much as provisionings for non-performing assets and other contingencies if credit offtake does not pick up, leading bankers told the Reserve Bank of India (RBI) last week.

RBI deputy governor Y V Reddy has been holding a series of discussions with bankers to discuss the slack offtake in bank credit.

With aggregate deposits growing faster than credit offtake, bankers said the opportunity cost of funds was putting pressure on spreads.

Any easing of the central bank's present interest rate regime would further hit spreads unless disbursals improve, they said.

 

The RBI is currently following a high short term rates regime in its attempt to support the rupee. Bank rate is ruling at 9 per cent.

More significantly, the RBI recently hiked the rate on its fixed rate securities repurchase (repo) agreement with banks to 8 per cent from 5 per cent. It also hiked the yields on treasury bills.

Since July 31 to date, the 14 day treasury bill yield was hiked to 8.89 per cent from 6.27 per cent, the 91 day bill yield was hiked to 9.99 per cent from 7.73 per cent, and the 364 day bill yield was hiked to 9.6 per cent from 9.04 per cent.

In a meeting with Reddy, bank chiefs said liquidity management was a problem and the 8 per cent fixed rate securities repurchase (repo) agreement was crucial in helping banks match their costs of funds by keeping overnight rates at 8 per cent levels.

The average cost of funds for the banking sector is around 8 per cent. Credit to the corporate sector can fetch a bank at least 14 per cent.

But with repo at 8 per cent, banks incur an opportunity loss of 6 per cent (14-8 per cent) when funds are not deployed into corporate credit.

The credit-deposit ratio has fallen to 49.42 per cent on September 25 this year compared to 51.36 per cent last year. This was despite a 17.3 per cent growth in credit to Rs 3,28,132 crore, as aggregate deposits grew by 21.5 per cent during the year to Rs 6,64,006 crore. Investments also grew by 18.7 per cent to Rs 2,51,560 crore.

Banks estimate the excess liquidity in the system at nearly Rs 7,500 crore, the amount outstanding in repos with the central bank.

"We do not have many investment avenues and are not able to deploy funds. In easy liquidity conditions, spreads will naturally be thin. Savings bank money is there, but we are losing money on one year deposits.