Conserving cash has become the topmost priority at banks in India too. As a result, lending has taken a backseat.
Banks want to hold on to as much liquid funds as they can to ensure they would continue to stay afloat on any aggravation in outflow of funds from the banking system.
“Staying liquid, that is the priority for banks now,” said TS Narayanasami, Chairman and Managing Director, Bank of India. “The big banks globally failed because they had become illiquid.”
Large dollar outflows, particularly because of selling by foreign investors in equity markets, is squeezing the banking system of liquidity. Foreign institutional investors (FIIs) have been net sellers of more then $9 billion worth of stocks in 2008 against net purchases of over $17 billion made in 2007. Foreign exchange reserves were down by $7.9 billion to $283.9 billion in the week ended October 3, 2008, a direct reflection of large dollar outflows happening.
Banks had stopped giving large loans to companies in August 2008. The aversion towards giving credit extended to retail loans, including home loans, this month amid concerns the fast worsening situation globally would lead to further heavy selling FIIs.
The demand for dollars, particularly from the FIIs which need to meet redemption pressures in their home countries, is leading to a sharp depreciation of the rupee. The Reserve Bank of India’s attempt at prevent a runaway fall in the rupee is leading to further squeezing of the rupee liquidity in the Indian banking system.
The RBI receives payment in rupees when it sells dollars from its foreign exchange reserves, which adds to the liquidity pressures in the banking system.
The stark indication of the acuteness of the shortage of funds in the banking system is underscored by the very high inter-bank lending rates. Banks borrowed over Rs 14,000 crore for three days on Friday last (October 10) at a weighted average rate of 19 per cent, depiste the fact that the trebling of the cut in CRR to 150 basis points was to release Rs 60,000 crore of funds into the banking system from October 11.
Asked about banks stopping disbursements, Bank of India’s Narayanasami said: “it has to. If I have to borrow resources at exorbitant rates, it does not make sense to do business.”Narayanasami, who is also the Chairman of the Indian Banks’ Association, is a member of the liquidity committee headed by Finance Secretary Arun Ramanathan.
Banks have completely stopped lending to real estate developers and are not giving loans even to oil marketing companies including Indian Oil Corporation, which are cash strapped because petrol and diesel are being sold to consumers at subsidised prices