Though banking system faces liquidity crunch, banks under lending restrictions see deposits grow

Commercial banks, under the prompt corrective action (PCA) framework of the Reserve Bank of India (RBI), are sitting on a pile of cash as they don’t have too many options to lend, even as the banking system is scrambling for liquidity.

The 11 public sector banks under the PCA, enjoying 25% market share among commercial banks, are facing restrictions on lending while their deposit mobilisation has been healthy.

Liquidity deficit

The average liquidity deficit in the banking system has been about ₹1 lakh crore since October with the shadow banks impacted the most as they are finding it difficult to raise funds following the IL&FS crisis. This, in turn, is affecting the loan market.

“The daily average cash surplus in my bank is about ₹20,000 crore to ₹25,000 crore,” said the chief executive of a public sector bank which is under the PCA framework. Though deposit mobilisation had picked up, there were restrictions on lending by the bank, the official explained. A senior official from another mid-sized public sector bank said the bank’s daily excess cash was about ₹40,000 crore.

As a result, the bank’s statutory liquidity ratio (SLR) was about 27-28%, much higher than the RBI mandated 19.5%. SLR is the minimum amount of liabilities that a bank must invest in government securities.

For banks under PCA, the ratio is much higher. “As a result, we have no other option but to invest in government bonds,” another senior official from a public sector bank said. Investments in government bonds is the most risk-free avenue to park funds which, in banking parlance, is known as ‘lazy banking.’ While ‘lazy banking’ refers to the risk averse nature of banks, here, the situation is slightly different as their hands are tied.

No curbs on deposits

“Banks under PCA are sitting on high liquidity as deposit growth has picked up. While there is no restriction on them to get deposits, they face constraints on lending. So they are investing the resources in government bonds, which has resulted in high SLR holding,” said Madan Sabnavis, chief economist, CARE Ratings.

According to the latest RBI data, year-on-year deposit growth is 9.7% till the week ended December 7 compared with 2.7% a year ago.

“In this context, the government’s decision to provide the banks under PCA with additional capital is a good move which will bring them out of the framewok gradually so that lending activity can get a boost,” said Mr. Sabnavis. Last week, the government had sought Parliament’s approval to provide ₹41,000 crore to PSBs in the current fiscal. The aim is to provide capital to the banks under PCA, which will help them come out of restrictions imposed.