The Reserve Bank of India’s decision to tighten liquidity through a series of measures,including limiting bank borrowing through the liquidity adjustment facility (LAF) to R75,000 crore,is a negative for banks that are heavily dependent on short-term funding.
Late on Monday,the central bank also announced open-market sales of government bonds to suck out R12,000 crore in liquidity and increased the marginal standing facility (MSF) rate by 200 bps to 10.25%. The MSF rate is considered a penal rate and banks avail of this as a last resort.
India’s largest lender,State Bank of India (SBI),feels that these measures do not warrant any change in the lending rates,since they are designed by RBI to curb speculation in the market and are not seen as indicative of any systemic problem or deeper malaise. In a statement on Tuesday,the bank stated that it expects the position in the market to stabilise shortly.
However,as a result of these measures,lenders like Yes Bank,IndusInd Bank,Kotak Mahindra Bank and Axis Bank,which have a higher concentration of bulk deposits in their total deposits,are expected to be affected negatively. Moreover,non-banking finance companies (NBFCs),which depend on short-term funding,are also likely to be affected,as their borrowing costs could shoot up.
Some players who go
for short-term funds and lend to personal loans or car loans might be affected,” said Keki Mistry,vice-chairman and chief executive officer,HDFC.
Bankers,however,say these measures may be temporary and,therefore,the impact could be minimal. The last time the central bank took similar steps was in 1998,but withdrew the measures after two months,they pointed out.
While bankers played down the impact of the RBI’s moves,analysts expect banks to face pressures on multiple fronts. Not only will the spike in bond yields hit the treasury portfolio of banks in the second quarter,liquidity pressures may also force some banks with already high loan-deposit ratios to pull back on credit growth.
In addition,the biggest risk from these set of measures could emerge if the lack of liquidity leads to corporate asset quality problems,analysts said.
As we have highlighted in previous research,corporate asset quality issues were being understated by banks continuing to roll over debt. As this becomes difficult/ pricey with the lack of liquidity,some of these assets may turn to NPLs on banks books quicker than expected, analysts with Credit Suisse said in a report on Tuesday.
According to V Ravi,chief financial officer,Mahindra Finance,no player would go for any fresh borrowing for at least 10-15 days.