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Banks facing dearth of funds for over five months

Last Updated 26 March 2019, 08:47 IST

The availability of funds also referred to as liquidity, has been constantly pinching the Indian banking system for the past five months, since IL&FS fiasco, and has affected the transmission of a cut in interest rates to end consumers.

Last week was the 24th consecutive week when the banks faced the crunch of funds, triggered by a whopping Rs 90,000 crore default by non-banking financial corporation (NBFC) IL&FS in September 2018.

Since October last year, of the 127 working days, Indian banks witnessed surplus liquidity on only 12 occasions -- a mere 9.4% of the time period, according to data compiled by Care Ratings.

During the five-month period, the daily liquidity deficit in the banks touched as high as Rs 1.83 lakh crore on December 26, 2018 -- highest in past three years.

On a monthly basis, post-IL&FS fiasco, the average daily liquidity crunch in the Indian banks’ has gone up from Rs 1,000 crore in August 2018 to Rs 76,000 crore in February 2019.

The liquidity deficit happens when banks borrow more money from the Reserve Bank’s daily adjustment facility than they deposit.

The increase in the cash circulation -- a phenomenon seen in the build-up to the elections -- has also been one of the triggering factors in the liquidity crunch in the Indian financial system. More of money in circulation with public means, lesser resources for banks to deploy.

Since the beginning of this financial year, the cash in circulation has increased by Rs 1.17 lakh crore to Rs 21.42 lakh crore from Rs 20.25 lakh crore -- a jump of 5.8%.

Liquidity deficit is caused by a gamut of factors, including higher growth in credit than the deposits, increase in currency in circulation due to festivities or elections, and RBI’S intervention in the forex market to limit the depreciation of rupee.

Experts believe that this shortage of funds has led banks not to transfer benefits of the rate cut to customers despite repo-rate cut by the Reserve Bank.

“Lack-lustre transmission could be because they don’t have enough money to lend. So whatever money they have to lend will be on a higher rate so that they can earn enough money,” said Manisha Sachdeva, Associate Economist at the Care Ratings.

Three top bankers, two from the public sector and one from private sector banks, told DH that the banks were reluctant to transmit the benefit of the repo-rate cut to the customers because of this, despite increased pressure from the government to cut rates in the build-up to the general elections.

“The banks are having a consistent shortage of funds post IL&FS fiasco. And that is one of the major reasons behind banks not transmitting the interest rate benefit,” a top private banker told DH, wishing anonymity.

However, bankers are hopeful a second rate cut of 25 basis points by the central bank in April will help ease the situation a lot.

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(Published 26 March 2019, 02:58 IST)

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