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MUMBAI :
The move by the Reserve Bank of India (RBI) to reduce the reverse repo rate by 115 basis points (bp) since March 27, pushing banks to lend to “productive sectors” does not seem to have worked. Non-bank financial companies (NBFC) will continue to face a funding crisis as commercial banks continue to park more money with the central bank’s reverse repo window.
The reverse repository is the rate at which RBI borrows from commercial banks and is an important monetary policy tool designed to control the liquidity of the system.
The first reverse repo cut occurred on March 27 and the next on April 17. However, despite these sharp cuts, banks have parked ₹7.21 trillion on April 23 at the fixed rate inverse repo (at an interest rate of 3.75%), compared to ₹7.09 billion on April 17 (3.75%) and ₹4.43 billion on March 27 at 4%.
The reverse repurchase rate was lowered to make it relatively unattractive for banks to passively deposit funds into RBI, according to the central bank’s monetary policy report in April.
Most NBFCs have allowed a moratorium on their borrowers, but have not received the same from lenders.
The NBFCs, which have yet to obtain a uniform bank moratorium, urgently need liquidity. Experts believe that although the sector’s ability to withstand a liquidity crisis is better than it was after the financial services and infrastructure leasing crisis in September 2018, the covid-19 pandemic has led to a decline. in collections from borrowers.
The outlook for NBFCs and home finance companies (HFCs) has turned negative due to the coronavirus outbreak, Care Ratings said in a report on April 17. “The sector, which dealt with disruptions on the liability side, could see another wave of challenges, this time in the form of asset quality. Amid these, financing challenges could increase again as banks become more selective in extending credit, “the report said.
Perhaps the banks are waiting for the government to make some kind of announcement supporting the flow of credit from banks to non-bank financiers, Umesh Revankar, chief executive of Shriram Transport Finance, said by phone. “I think lenders expect the government to announce a credit guarantee scheme for certain sectors, including the NBFC sector. The clarity of the government will be useful to restart the flow of credit, “he said.
RBI data, compiled by Bloomberg, showed that the banking system’s liquidity has been in surplus mode in March and so far in April. The largest surplus was on April 18 and 19 at ₹7.32 trillion, while the lowest point was on March 16 at ₹2.91 trillion.
The excess liquidity is because banks are seeing lower credit growth than deposit growth, said Sameer Narang, chief economist at the Bank of Baroda.
“When that happens, the banks will have excess liquidity. The same thing happened during the demonetization also when a large amount of money returned to the banks as deposits. Even then the money was stationed with RBI, “said Narang.
After having burned their fingers on the last bad loan cycle, banks are wary of loans not only to NBFC but to several others as well. Non-food credit growth stood at 6% for the fortnight ended March 27, compared to 13.3% in the same period last year.
In November 2016, the government banned currency notes from ₹1,000 and ₹500. Total deposits in the banking system stood at ₹135.71 billion, of which ₹110.6 trillion were in time deposits and the rest in demand deposits, RBI data showed.
Meanwhile, banks offered and borrowed on Thursday. ₹Rs 12.85 billion or a little more than half of what was offered in Reserve Bank’s first long-term repository operation window (TLTRO) 2.0.
This once again showed their reluctance to lend to non-bank lenders.
