Coronavirus Lockdown: Banks don’t lend, park cash with RBI

Banks are opting to park their cash with the Reserve Bank of India (RBI) instead of lending to businesses for fear of bad loans or NPAs amid the coronavirus crisis.

According to the latest RBI data, scheduled commercial banks have parked close to Rs 7.5 lakh crore from March 27 to April 10 compared to a measly Rs 1.7 lakh crore in the previous two weeks, a sign that the central bank’s decision to cut interest rate sharply hasn’t worked.

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Knowing well that banks are risk-averse in lending to the commercial sector and shadow banks, which are the biggest lenders to housing and other personal loans, the RBI had taken some drastic measures such as cutting the reverse repo rate — the rate which banks park their extra cash with RBI.

The RBI had also announced it would release Rs 50,000 crore into the banking system at a cheaper rate so that they lend further.

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But nothing has worked so far.

The latest auction of Rs 25,000 crore through which the RBI planned to infuse liquidity into NBFCs and MFIs saw banks picking only half the bids.

This, in turn, has put pressure on the RBI to provide direct refinance facilities to non-banking finance companies instead of going via banks.

Yet another data point shows that the absolute increase in currency with the public in the first 10 days of the current financial year has been 25% more than what it was the previous year, jumping by Rs 41,583 crore compared with Rs 33,395 crore in the corresponding quarter last year till April 10 on a year-to-date basis.

Currency with the public is arrived at after deducting cash with banks from total currency in circulation.

Analysts say people started hoarding cash more after the lockdown period was announced -- which can be explained by the decrease in the demand deposits since March 27, according to RBI data.

“There is much to do with the lockdown. Given the uncertainty, people would want to keep money with them,” says Kavita Chacko of CARE Ratings.

This is explained by the sudden drop of Rs 1.36 lakh crore in the demand deposits since March 27, around the same time the lockdown was announced.

Despite this, the banks are flush with the funds, primarily because of investors moving the money towards time deposits. 

The time deposits -- which are considered usually low-risk, low-return asset classes -- have seen a surge in the inflows as investors are averse to investing in the equity markets -- which have been plagued by the bear.

The RBI data shows that since March beginning, inflows into time deposits have surged by Rs 3.69 lakh crore (3%) to Rs 129.59 lakh crore.