E-Paper
Banks choke NBFC lifeline, park more funds with RBI
The reverse repo is the rate at which RBI borrows from commercial banks and is an important monetary policy tool aimed at controlling system liquidity.
The Reserve Bank of India’s (RBI’s) move to lower the reverse repo rate by 115 basis points (bps) since March 27, nudging banks to lend to “productive sectors” does not seem to have worked. Non-banking financial companies (NBFCs) continue to face a funds crunch as commercial banks keep parking more money with the central bank’s reverse repo window.
The reverse repo is the rate at which RBI borrows from commercial banks and is an important monetary policy tool aimed at controlling system liquidity.
The first reverse repo cut happened on March 27 and the next on April 17.
However, despite these steep cuts, banks have parked ₹7.21 lakh crore on April 23 in the fixed rate reverse repo (at an interest rate of 3.75%), compared with ₹7.09 lakh crore on April 17 (3.75%) and ₹4.43 lakh crore on March 27 at 4%.
The reverse repo rate was reduced to make it relatively unattractive for banks to passively deposit funds with RBI, according to the central bank’s monetary policy report for April.
Most NBFCs have allowed a moratorium to their borrowers but have not received the same from lenders.
NBFCs, which are still to get a uniform moratorium from banks are thus in dire need of liquidity. Experts believe though the sector’s ability to withstand a liquidity crunch is better than it was post the Infrastructure Leasing and Financial Services crisis in September 2018, the covid-19 pandemic has led to a decline in collections from borrowers.
The outlook for NBFCs and housing finance companies (HFCs) has turned negative because of the coronavirus outbreak, Care Ratings said in a April 17 report. “The sector, which grappled with liability side disruptions, could see another wave of challenges, this time in the form of asset quality. Amid these, funding challenges could mount again as banks become more selective in extending credit,” the report said.
Banks are perhaps waiting for the government to make some sort of announcement of backing credit flow from banks to non-bank financiers, Umesh Revankar, chief executive, Shriram Transport Finance, said over phone. “My sense is that lenders expect the government to announce a credit guarantee scheme for certain sectors, including the NBFC sector. Clarity from the government will be helpful to restart the flow of credit,” he said.
Data from RBI, compiled by Bloomberg, showed that the banking system 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 lakh crore while the lowest point was on March 16 at ₹2.91 lakh crore.
The excess liquidity is because banks are seeing lower credit growth than the growth in deposits, said Sameer Narang, chief economist, Bank of Baroda.
