Liquidity Squeeze Hits Psu Banks

The short-term liquidity squeeze afflicting foreign banks has also spread to public sector commercial banks. Several commercial banks, including Bank of Baroda, Canara Bank and Corporation Bank, are raising short-term funds at interest rates above 20 per cent, revealed treasury managers.

Meanwhile, the shoring-up tactics adopted by foreign banks to overcome the liquidity crunch has created a peculiar situation in the forex market. These banks have been raising dollar deposits and then selling it to raise rupee resources. Thereafter, they buy the foreign exchange back in the one-two month period forward markets.

As a result, there is a glut of dollars in the spot market and an abnormal demand for them in the short end of the forward market, resulting in an inversion in the premium rates. In other words, the premium for one-two months is higher than for five-six months.

 

BoB recently picked up Rs 122 crore from the Rural Electrification Corp through 90-day certificates of deposit at 22 per cent, the highest among all the domestic banks. Sources said the effective cost of this CD transaction after factoring in a 25 per cent SLR and a 10.5 per cent CRR could go over 25 per cent.

Other banks which had made a pitch for this deposit included the Bank of India, SBI, private sector banks like ICICI Bank and the IndusInd Bank and a clutch of foreign banks.

The private sector banks were unable to offer anything beyond 20 per cent and SBI and BoI were unable to match BoBs rates. On the other hand, the foreign banks were prepared to quote up to 24 per cent for short-term deposits. However, the Bureau of Public Enterprises guidelines bar PSUs from parking deposits in foreign banks.

Other public sector undertakings and corporates have also started parking their short term surpluses into such high yielding CDs.

Again, foreign banks have been desperately seeking rupee funds to minimise the asset-liability mismatch due to the dollars reversal against the rupee. These banks had been forced to resort to swaps to fund mismatches in the call market, resulting in high forward premia in the foreign exchange market at the short end. The swaps have resulted in the rupee soaring to Rs 38.70 and the premium shooting up to 23 per cent for the first month.

As an alternative to resorting to such swaps, some big foreign banks began taking CDs last week, initially at rates of over 17 per cent. In a bid to cut swap costs, these banks also sold commercial papers at yields of over 25 per cent. Sale of CPs was seen as a better alternative than borrowing call money, interest rates on which peaked at 60 per cent last Wednesday, or resorting to short-dated swaps at about 35 per cent.