Bank lending from RBI at 4-month high

MUMBAI: Surplus liquidity in the banking system has proved to be short-lived as lenders' borrowing from the Reserve Bank has risen to a four-month high, signalling monetary management may be getting tricky with slowing deposits growth.

The demand for loans is also lower than what the RBI had projected, but the demand for cash from customers in the festival season and banks' repayment obligations are straining liquidity, bankers said.

On Thursday, banks borrowed Rs 1.01 lakh crore through the RBI's repo window, the highest since June 19 this year. Banks can borrow funds by pledging government securities to meet their short-term asset-liability mismatch.

They also borrow to meet the 4.5% cash reserve ratio, or CRR - the proportion of deposits they have to keep with the central bank.

The surge in the borrowing is not worrisome as yet since there's an overall surplus in the system with some banks owning government bonds well above the stipulated 23%.

"The liquidity is very much within the Reserve Bank of India's level of comfort," said Sanjay Arya, executive director, United Bank of India. "The rise in borrowing is just an outcome of product management by banks. Rates on commercial paper or certificate of deposits have not risen sharply and the call rates have been steady, which shows the liquidity situation is not worrying.''

Yet another reason bank treasuries cite for the tightness in liquidity is the marginal rise in CBLO or collateralised borrowing and lending obligation rates, which is the overnight borrowing market. The rates in the CBLO markets have risen to 8.14% from below 8% in the last few days, forcing banks to borrow from the RBI's repo window rather than borrowing from the CBLO market.

Government bonds owned by banks in their SLR portfolio are 7% over and above the limit of 23%, RBI data show.

Anticipating a pick-up in credit demand, the Reserve Bank of India had cut the CRR by 25 basis points to 4.5% on September 17, releasing Rs 17,000 crore into the monetary system. A basis point is 0.01 percentage point.

"I expect the bank borrowing to exceed Rs 1.1-1.2 lakh crore since it is a reporting Friday and there is bond sale due from the RBI on Friday," said RV Raman, deputy general manager, Lakshmi Vilas Bank. "Banks would rather borrow from the repo window than go to the CBLO market."