Banks are trying to increase their returns on idle cash by offering short-term loans to boost the top line in a quarter when treasury income is expected to come under pressure.
Partly due to higher short-term lending and payment of advance tax by companies, banks are parking a third of what they did a week ago at the Reserve Bank of India’s (RBI’s) reverse repo window.
Bankers said that in normal times such a sharp drop could trigger liquidity injection. But at present, there is a talk of an increase in the cash reserve ratio (CRR), or the proportion of deposits that banks set aside, over the next few weeks as the central bank starts exiting the easy monetary policy regime. “On the surface, these are contradictory signals,” said the treasury head of a large public sector bank.
Dhanalakshmi Bank Chief Financial Officer Bipin Kabra said this was a transitory phase and did not signal tight liquidity conditions. He pointed out banks were storing cash with them ahead of the long Christmas weekend.
The outgo on account of corporate tax in December and a small rise in bank credit have reduced fund availability in the system, albeit for a short period, added treasury heads of several banks.
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“It is not a case of scaled down availability of funds. The first week of January will be different. The government expenditure and payments and salaries will bring funds back into system and improve liquidity,” said the treasury head of a foreign bank.
The advance tax payments have sucked out about Rs 40,000-45,000 crore. The bond auction by central and state governments took out about Rs 15,000 crore. This money would come back into the system.
At this point, any hike in CRR would be to contain inflationary expectation and not to suck out liquidity from the system, pointed out a senior public sector bank official.
While there is improvement in credit demand, it is not large enough to dry up liquidity from the system. Banks are trying to maximise returns by offering short-term loans. This was happening to grow the top line before closing the third quarter (December 2009), said a Bank of Baroda official.
The growth in top line does not necessarily mean some improvement in income in near future. Perhaps, the slack credit offtake and hardening of yields were forcing banks to make provisions for marked-to-market securities portfolio, which meant pressure on bottom lines, pointed out another public sector bank official.
A dealer with a public sector bond house said the amount parked with RBI would return to the level of Rs 75,000 crore and above in January 2010.
The call money rate ended at 3.25-3.35 per cent today, almost unchanged from its Monday close of 3.30-3.35 per cent, as ample liquidity prompted banks to lend near RBI’s reverse repo rate, dealers said.
Inflows into RBI's reverse repo tender continued to remain subdued because of advance tax outflows.
On Wednesday, the interbank overnight rate is likely to trade steady around 3.25 per cent because of ample liquidity in the banking system. The demand for funds may be high because banks tend to meet most of their reserve needs in the first week of the reporting fortnight itself.
RBI might drain around Rs 40,000 crore through its reverse repo tender tomorrow, dealers said.