Banks flush with funds as deposits outnumber advances

Indian banks have been flush with liquidity -- availability of the funds -- in the recent past as the amount of deposits have far outnumbered the advances in the current financial year.

According to the latest data available with the Reserve Bank of India, the total deposits in the banking system have grown by Rs 3.85 lakh crore, while advances have grown by only Rs 89,193 crore.

This, in essence, shows that of all the incremental deposits that banks have received this financial year, they have disbursed only 23% of them, while leaving the remaining Rs 2.96 lakh crore as idle.

On the contrary, in the corresponding period of the last financial year, the banks had lent more than the deposits they had received. The banks had lent Rs 5.07 lakh crore in the first eight months of the FY19, 131% of Rs 3.88 crore deposits that they had received during the same period.

“The banks are cautious to lend to big projects. Such demand is also scant. There are also fears of bad loans adding to it. It will continue like this for some time,” Madan Sabnavis, Chief Economist, CARE Ratings said.

He further believes that the positive net liquidity, which has been witnessed by the financial system this year, is a result of the banks not disbursing the full amount of loans.

“This amount has gone into term reverse repo as average net liquidity has been Rs 2.5 to 3 lakh crore,” he says. The net liquidity in the financial system has remained heavily positive in the current financial year, despite the fact that many of the shadow banks have been reeling under a severe liquidity crunch and have been on selling stakes in their various arms.

The reverse repo is the arrangement, under which the banks park their excess funds with RBI at a reverse repo rate -- which is 25 basis points lower than the repo rate at any point in time. The current reverse repo rate stands at 4.9%.

This, idleness of the funds, however, isn’t likely to impact the profitability of the banks, as they save on capital and non-performing asset (NPA) provisioning, according to the analysts.

Among the various categories of deposits, it is only the time deposits that have shown growth in the current financial year.

The time deposits have grown by Rs 5.65 lakh crore in the first eight months of the current financial year, while demand deposits have dipped by Rs 1.8 lakh crore.