Cash Shortages Hit Indian Banks
Dec. 22 – Indian banks may recently be experiencing a cash crunch caused by the increasing borrowings of domestic companies since July this year. The shortage has increased the repo borrowings by banks as well as the interbank loan interest rates, according to a December 21 report on Times of India (TOI).
On December 20, Indian banks used the repo route to raise a record Rs. 1.59 trillion, according to a TOI report using the Reserve Bank of India’s overnight funding window as an indicator. Interest rate in the call money market – an overnight market used by banks to lend or borrow from other banks – has also reached a high of 7 percent.
Cash started to be drained out from the Indian banking system in July, when companies paid over Rs. 1 trillion for use of spectrum or radio waves in order to offer third generation mobile telephones and broadband services. The liquidity deteriorated in December and bankers expect the tightness to last till the end of the month, as companies paid taxes for the third quarter on December 15 and the government pays salaries, pension as well as other department expenditures.
Both the RBI and the Indian government have issued some measures to soothe the tight money supply. RBI has lowered the statutory liquidity ratio (SLR) to 24 percent – the minimum holding level of government securities. The move enables more liquidity in the banks, most of which have already been holding sufficient government securities compared to the newly-set SLR floor.
The Indian government also announced its intention to reduce its market borrowing from the scheduled Rs. 110 billion to Rs. 60 billion this week to ensure the cash adequacy in the banking system.
Indian banks have been having difficulty making their deposits keep up with the pace of loan outflow. A September 20 report on the Chinese major portal Tencent says the major reasons causing India’s bank loan surplus compared to deposits since May of this year is because of the RBI’s strict control over money supply to curb the country’s domestic inflation, which rose to a two-year high of 10.16 percent in May and fell to 7.48 percent last month.
- Previous Article India and China Call for More Banking Presence in Each Other’s Countries
- Next Article Delhi High Court Upholds ICC Decision Favoring American Company