The liquidity crunch is mainly because the Reserve Bank is sucking money out of the system as it fights to contain inflation which has been well above its band of 4 per cent in the last 10 months of the year. it has inspired reserve Bank of India To step up its inflation fight by raising policy rates by 190 basis points to pre-pandemic levels since the start of the war against Ukraine.
The average net durable liquidity injected into the banking system in April 2022 was Rs 8.3 lakh crore, which is almost a third of what is now Rs 3 lakh crore. Moreover, the government has spent a major part of its cash balances in the Diwali week, and as a result the net LAF (Liquidity Adjustment Facility) in the system, which was negative so far, has improved of late. Bonus payments by the government and the private sector also helped.
Even as the banking system has moved closer to a calibrated liquidity with higher signaling rates, one thing still hasn’t changed that credit risks are not being adequately priced, even as credit demand hits a decade high. and liquidity has been significantly reduced, argues Soumya Kanti Ghosh, chief economic adviser to the group. state Bank of Indiain a report.
What is still interesting, as per the report, is that even though the banking system is witnessing a net LAF deficit, market sources say that the risk premium over core funding cost may not appropriately accept the underlying credit risk. doing.
For example, short-term working capital loans of less than one year are granted at less than 6 percent and are linked to one-month/three-month T-bill rates, while 10- and 15-year loans are offered at less than 6 percent. The price is less. more than 7 percent.
Significantly, the 10-year G-Sec is currently trading around 7.46 percent, while the 91-day T-bill is trading around 6.44 percent and the 364-day T-bill is trading around 6.97 percent.
The average core funding cost of the banking system currently stands at around 6.2 per cent, while the reverse repo rate stands at 5.65 per cent. No wonder, banks are currently engaged in a fierce battle to raise Deposit, rates up to 7.75 per cent are being offered across select maturities. Additionally, banks are now offering Certificates of Deposit (CDs) as the higher rate for 360 days paper is 7.97 per cent. Also, some banks have extended CDs at 7.15 per cent for 92 days.
Thus a significant part of the funding gap is also being met through CD raising. Outstanding CDs stood at Rs 2.41 lakh crore as on October 21, up from just Rs 0.57 lakh crore a year ago.
The CP market is also shrinking to Rs 0.78 lakh crore with the primary issuance of short-term paper after touching a high of around Rs 2.9 lakh crore in November 2021.
In the report, he says, yields have also increased by 255 basis points (bps) since April 2022 from 6.92 per cent in October 2022.
The good news is that such pricing wars for both fund-raising and lending are mostly confined to AAA-rated borrowers and should ultimately reduce risk-weighted assets as well, thereby reducing capital requirements, the report said. can be reduced.
In order to encourage large borrowers to move towards the corporate bond market, the RBI had introduced the idea of ​​Normally Permissible Lending Limit (NPLL) for them. But the current pricing trend is denying both this concept as well as the logic of term premium. Ideally, the benchmark yield should go down if the risk is low.
Interestingly, banks have adjusted deposit rates significantly upwards in October. Further, given that 45 per cent of bank deposits are low-cost CASA (current account savings account), it is only 55 per cent fixed deposits that need adjustment and hence ideally, an increase of 190 bps in the repo rate This resulted in an increase of 105 bps in the deposit rates of the latter category.
Banks with better franchise and digital orientation will ensure that retail deposits triumph over bulk deposit collection in the long run, with the fact that meeting the Liquidity Coverage Ratio or LCR criteria is a privileged privilege to be mobilized through retail deposits only.