Banks shore up top line to meet quarter-end targets

Banks borrowed heavily from the Reserve Bank of India (RBI) on Wednesday to shore up their balance sheets to meet their quarterly targets. This is despite the central bank advising them not to fund credit through overnight borrowed funds.

According to data released by RBI, banks borrowed Rs 96,330 crore from the central bank’s liquidity adjustment facility (LAF), compared with Rs 49,000 crore yesterday.

“The high repo borrowings are because banks wanted to shore up their top line to meet quarterly targets. Since securities are available with banks, they pledge it to RBI for funds to meet loan disbursement,” said a treasury official of a public sector bank.

Bankers indicate most banks must be having two-three per cent more government paper with them. Banks need to maintain a statutory liquidity ratio of 24 per cent of their net demand and time liabilities.

A treasury official with an associate bank of State Bank of India also confirmed that on Wednesday's sharp rise in LAF figures was partly driven by the need to meet quarter-end targets. “Some customers are asked to draw down part of unused credit lines for short term and lending is done through LAF money.”

During the third quarter review of the monetary policy in January, RBI had asked banks to narrow the credit deposit growth gap and not to fund credit growth through repo borrowings.

“The Reserve Bank will constantly monitor the credit growth and, if necessary, engage with banks which show an abnormal incremental credit-deposit ratio,” RBI had said in January.

In March, RBI Deputy Governor K C Chakrabarty had told Business Standard: “The LAF money is not meant for lending on a continuous basis. The system cannot run like that. The facility is for meeting liquidity needs arising out of mismatches of temporary nature.”

The borrowing though the LAF window, which also indicates liquidity tightness in the system, is almost double than the central bank's comfort level. RBI had articulated its liquidity comfort zone around (plus/minus) one per cent of net demand and time liabilities or Rs 50,000 crore.

Banks have borrowed these large LAF funds despite healthy deposit growth during the current financial year on the back of attractive interest rates. Deposit growth as on June 17 was 18.21 per cent year on year, higher than RBI's projection of 17 per cent for 2011-12. Credit growth, on the other hand, remained strong with 20.7 per cent as on June 17. RBI had projected 19 per cent credit growth for the current financial year.

Source: Business Standard