Banks may tap All India Financial Institutions (AIFIs) for refinance as liquidity in the banking system moves into deficit mode even as credit shows double-digit growth in percentage terms.

While banks have been mopping up resources via Certificate of Deposits (CDs) in a big way amid rising interest rates, they will also be weighing the option of tapping longer term refinance, said a top executive of a private sector bank.

Statutory pre-emption

The advantage of taking refinance from AIFIs (National Housing Bank, Small Industries Development Bank of India and National Bank for Agriculture and Rural Development) is that there is no statutory pre-emption. They are not required to maintain reserve ratios (cash reserve ratio and statutory liquidity ratio) on these funds.

However, in the case of CDs, banks have to maintain the aforementioned reserve ratios. So, if they raise ₹100 crore via CDs, they have to park (4 per cent of the amount raised), or ₹4 crore, with the Reserve Bank of India as CRR and invest (18.5 per cent of the amount raised), or ₹18.5 crore in Central/ State government Securities, as SLR. Hence, statutory pre-emption reduces the amount banks can lend to ₹77.5 crore.

CDs are negotiable, unsecured money market instruments issued by banks as Usance Promissory Notes. Their tenor cannot exceed one year. In sharp contrast, refinance from AIFIs is available for a longer period. For example, NHB and SIDBI offer refinance for 1-15 years and 3-5 years, respectively.

That the banking system’s liquidity is fast drying up is underscored by the fact that the net liquidity injected by the RBI (outstanding including liquidity management operations on September 26) stood at ₹1,641.57 crore. This is in sharp contrast to liquidity surplus of about ₹7-lakh crore in March.

As on September 9, all scheduled banks’ credit grew 16 per cent year-on-year, according to the RBI’s Scheduled Banks’ Statement of Position in India data. However, deposits grew at a slower pace — 9.29 per cent y-o-y.

CARE Ratings, in a report, noted that apparently a significant part of the funding gap has been met by the mobilisation of CDs. The outstanding CDs stood at ₹2,43,600 crore as of September 9, compared to just ₹67,145 crore a year ago.

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