Afraid to lend, few borrowers – why banks are flooding RBI with low-yielding funds

New Delhi: Indian banks are brimming with funds but are reluctant and unable to lend during the lockdown, and hence they store their funds with the Reserve Bank of India at an interest rate as low as 3.75%.

The reluctance, which is driven by growing risk aversion and a lack of demand for credit following a slump in economic activity, has seen banks deposit record amounts with the RBI, bankers and analysts say . The average amount deposited between May 4 and May 6 was over Rs 8 lakh crore.

However, despite having ample liquidity, banks pay a comparatively higher interest rate of 5-6% on term deposits without being able to lend these funds to borrowers. Typically, banks collect funds from deposits and then lend at higher interest rates. The difference between deposit and lending rates makes lending a profitable business for banks.

The Narendra Modi government imposed a nationwide lockdown, starting March 25, to curb the spread of the Covid-19 pandemic. The lockdown has been extended twice and is now set to end on May 17.

In the meantime, the RBI has also announced several measures to encourage banks to lend to different sectors of the economy and injected liquidity into the system through various measures. However, this did not yield the expected results as banks, fearing an increase in bad debts, were reluctant to lend to businesses.


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Thousands of crores every day

On May 6, banks deposited Rs 8.1 lakh crore with the RBI under the reverse repo window, according to data released by the central bank on Wednesday. The day before, the amount was Rs 8.5 lakh crore, and on May 4, it was Rs 8.4 lakh crore. Data for May 8 has not yet been released, while May 7 was a public holiday. The reverse repo is the rate at which RBI borrows from banks.

Chart: Soham Sen | The footprint

During the previous week, starting April 27, banks had deposited an average of Rs 7.4 lakh crore per day (during working days), while during the week starting April 20, banks had deposited Rs 7.1 lakh crore on average.

SBI Chairman Rajnish Kumar attributed the excess funds to a cautious approach being followed by both banks and borrowers in times of uncertainty.

“SBI has the money and the will to lend but I can’t find the people who are willing to borrow,” Kumar said in an “Off the Cuff” conversation with ThePrint editor Shekhar Gupta last week.

Kumar added that companies have consciously deleveraged over the past few years and no longer have the confidence to overleverage given the expected deceleration in economic growth.

“Both bankers and borrowers are cautious in their approach,” Kumar said, adding that SBI is depositing Rs 1.5 lakh crore with RBI through the reverse repo window due to lack of lending opportunities.

“In the current situation, we do not need to take fixed deposits. Whatever extra money comes into term deposits is a loss-making proposition for the bank,” he said.


Read also : Rural economy shows positive signs, but lockdown must be lifted for recovery: SBI chair


Government and RBI give boost to banks

Both the government and the RBI pushed the banks to lend. Last month, the Department of Financial Services asked public banks to step up lending to stressed sectors of the economy.

In the same way, In a meeting Between bankers and RBI Governor Shaktikanta Das last week, the flow of credit to different sectors of the economy including non-banking financial corporations, microfinance institutions and mutual funds was discussed.

“Most economic activities are at a standstill and borrowers are not applying for credit. There is also risk aversion among banks due to uncertainty about the future. Banks are unwilling to lend because ultimately it is a business decision,” said Soumyajit Niyogi, associate director at India Ratings and Research.

“In addition to this, the RBI has also injected huge liquidity into the system. A clearer picture will emerge once the lockdown is over and economic activity resumes,” Niyogi said.

Impact of Covid-19 on bank credit

In the year ending March 2020, growth in bank credit to various sectors slowed to 6.7% from 12.3% a year ago.

Covid-19 and the prolonged lockdown have negatively impacted banks’ business operations due to weak demand and heightened risk aversion, Care Ratings said in a note dated May 5.

Going forward, “retail lending could see a marginal contraction in credit drawdown as consumer demand moderates due to the disruptions caused by Covid-19. The real estate sector could also face serious strains, as individuals would delay buying a home, which could impact home loans, as home loans account for more than 50% of retail loans,” he said.


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