Faced with a shortfall of liquidity on the back of expected 3G fee payouts and advanced tax outflows, banks may hike deposit rates, fear some. But this may not happen because government borrowings will come down
The banking system could come under severe strain as a big chunk of banks’ funds is set to flow out in a short span of time, feel some analysts. Funds to the tune of Rs1,00,000 crore could be drained out of bank treasuries in a matter of weeks as companies take out funds to pay advance tax and 3G license fees, fear some. Telecom companies alone will account for borrowings amounting to Rs70,000 crore to be paid to the government as fees for 3G spectrum allocation. Additionally, advanced tax outgo from companies’ bank accounts is expected to touch around Rs30,000 crore-Rs40,000 crore.
Will this sudden outflow of funds lead to a liquidity shortage in the system? If so, this could have a cascading effect on the economy for the short term. First, it could stymie banks’ ability to lend funds to the corporate sector, which has only recently shown some appetite towards credit. Some tightening is evident from the fact that banks yesterday managed to invest surplus funds of only Rs9,000 crore with the RBI under its reverse repo window, compared to the situation last week, when banks had parked Rs47,500 crore under the same window last Friday.
In such circumstances, banks may have to look for various ways and means to bridge the shortfall between demand and supply. Already, banks have resorted to redemptions from mutual funds to shore up their balance-sheets. Others have started raising money by issuing certificates of deposits.
If this liquidity crunch persists, banks would have to hike their deposit rates earlier than anticipated. A banking sector analyst from Anand Rathi believes that deposit rates could go up sooner as higher inflation and stronger credit off-take forces banks to revise the rate structure. “We believe there could be a 50 basis point hike in deposit rates on an average across the system as banks try to deal with a deposit crunch in the face of higher credit off-take. Also, with inflation still at a high level, real interest rates are negative at this point of time. Banks will have to take this factor into account while deciding on how to attract funds.”
Ambit Capital’s V Krishnan believes banks may need to mobilise resources a bit more aggressively by adjusting deposit rates upwards. “Each bank will take a call depending on what visibility they have on the lending side or how advances are going to flow out. They will then have a fair understanding as to how much resources they need on the liability side. If the liquidity corridor continues to be this low, deposit rates will definitely head upwards.”
However, the question remains, is all this temporary? DK Joshi, chief economist at credit rating agency CRISIL doesn’t expect the current liquidity shortfall to last much beyond the near term. “If banks sense that this problem will persist, they may definitely revise deposit rates. But I don’t see it (the liquidity crunch) continuing beyond a point. One must also see that the government will now be borrowing that much less due to the substantial 3G fee income. So, the overall pressure on the liquidity front will not be that large. Although it is a slight shock to the system for the near term, it will not last.” In fact, the economic conditions around the world are softening which may lead to lower demand for bank funds from companies.
Over the short term, banks are expected to continue to flock to the overnight RBI repo window to shore up liquidity. “More and more banks will go to the RBI repo window to access repo funds from the RBI so that they have enough liquidity to lend to their borrowers,” said suggests Mr Krishnan. — Moneylife Digital Team
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