Borrowings by banks hit a 8 ­month high of ₹ 5.05­ lakh crore

  • July 10, 2023
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Borrowings by banks hit a 8 ­month high of ₹ 5.05­ lakh crore

Subject : Economy

Section: Monetary Policy

In News: Outstanding market borrowings of banks touched an eight month high of ₹5.05 lakh crore as of June 16, the highest since October 21, as per data in the Reserve Bank of India’s weekly bulletin.

Key Points:

  • Banks borrow using various short term and medium term tools (see box) to meet their immediate liquidity needs arising through various reasons and for effective asset-liability management.
  • The present surge is expected to have been driven by short-term fund requirement of banks owing to quarterly advance tax payments
  • It is based on RBI’s fortnightly data, which tracks the short-term money market borrowings by banks in the form of interbank repo operations and tri-party repos.
  • Recently RBI updated the master directions Reserve Bank of India (Call, Notice and Term Money Markets) Directions, 2021 allowing banks (only Commercial Banks and not SFBs) to set their own limits for call and notice money borrowings, in addition to the existing facility available for term money borrowings. The move was taken with a view to allow more flexibility and help banks better manage their liquidity requirements, and is expected to support banks’ market borrowing going ahead.
  • In June, the tightening liquidity conditions resulted in higher money market rates, causing banks’ borrowing costs to rise. Still Banks are experiencing high growth of short term borrowing owing to various factors:
    • significant demand for credit, particularly for short-term loans
    • slow deposit growth.
    • quarterly advance tax payments
  • Outstanding market borrowings of scheduled commercial banks had risen to ₹4.6 lakh crore as of March 2023 from ₹2.7 lakh crore a year ago.
  • Borrowings also include securities such as additional tier-1 bonds (Bonds, which are counted towards equity, have not fixed maturity period, and can be written off in case of extreme capital shortfall) and infrastructure bonds.
Call, Notice and Term Money Markets

  • The money market primarily facilitates lending and borrowing of funds between banks and entities like Primary Dealers (PDs). Banks and PDs borrow and lend overnight or for the short period to meet their short term mismatches in fund positions.
  • This borrowing and lending is on an unsecured basis.
    • ‘Call Money’ is the borrowing or lending of funds for 1 day.
    • ‘Notice Money’ involves lending for a period between 2 days and 14 days
    • ‘Term Money’ refers to borrowing/lending of funds for a period exceeding 14 days.
  • Inter banks repos and triparty repos are other sources of short term financing.
    • Interbank repos involve collateralized lending allow banks to lend cash to each other with the purchased securities acting as collateral.
    • Repo, which is short for “interbank repurchase agreements,” is a financial transaction between banks involving the sale and repurchase of securities. In an interbank repo, one bank acts as the seller, while the other bank acts as the buyer.
    • The selling bank owns securities, typically government bonds or other high-quality assets. It agrees to sell these securities to the buying bank and receives cash in return.
  • Inter-Bank Participation Certificates (IBPCs) is yet another short-term money market instrument whereby the banks can raise money/deploy short-term surplus.
    • In the case of IBPC the borrowing bank passes/sells on the loans and credit that it has in its book, for a temporary period.
    • Investments in IBPC are also used to meet the priority sector lending targets.

Why the 14 day limit for short term?

  • If a bank lends to another for a period longer than a reporting fortnight (14 days), then this loan becomes a part of net demand and time liabilities (NDTL) for the borrowing banks
  • NDTL is the basis on which Banks have to maintain reserve statutory liquidity ratio (SLR) and cash reserve ratio (CRR).
  • These reserves dramatically increase the cost of such loans for the borrowing bank. Consequently, almost all short term interbank lending is restricted to a maturity of up to 14 days.
Borrowings by banks hit a 8 ­month high of ₹ 5.05­ lakh crore economy