Banks are seen increasingly augmenting deposits from certificate of deposits (CDs) and bulk deposits offering 15-20 basis points more to tide over the present elevated liquidity risks.
In order to absorb excess liquidity, the RBI imposed a 10 per cent incremental cash reserve ratio (I-CRR) with effect from August 12, due to an increase in the Net Demand and Time Liabilities (NDTL) of banks between May 19 and July 28.
Bank deposits as of May 19 were ₹183.74 trillion which increased to ₹191.67 trillion by July 28 posting an incremental rise of ₹7.93 trillion. Despite the part contribution to the rise in deposits due to the withdrawal of ₹2,000 currency notes, RBI imposed I-CRR on the entire incremental rise in deposits during the period.
At the same time, due to increased demand, the non-food credit grew from ₹138.57 trillion to ₹147.82 trillion during the same period with incremental outflow of liquidity at ₹9.25 trillion.
Deposits have grown by 12.9 per cent year-on-year (YoY) whereas the credit growth was at 15.4 per cent (YoY) as of July 28. Effectively, the credit-to-deposit (CD) ratio during the particular period was 116 per cent.
In the process, the load of I-CRR and increased credit outgo could exacerbate the near-term liquidity risk in some banks. The cost pressure is building up. Banks will not get any interest on I-CRR but will have to pay interest on deposits to customers. Interest load on I-CRR together with hike in short-term money market rate pushes up the cost of liquidity risk management.
The present elevated liquidity risk and higher cost of management of risks may recede soon, once RBI lifts I-CRR and normalcy is restored. But in the last five years there has been a structural shift in the saving pattern from banks to other upcoming financial markets.
Data on bank deposits and credit growth from March 2020 to March 2023 witnessed an interesting shift in the accretion of assets and liabilities. Deposit growth is slowing down and credit growth is going up due to a rise in interest rates adding to the intensity of liquidity risks. This is squeezing liquidity.
In the meantime, RBI in a bid to normalise monetary policy brought back CRR to 4.5 per cent and began to absorb excess liquidity to fight inflation.
In the evolving liquidity risks, the asset liability management committee (ALCO) of banks will have to go far beyond the near-term strategies to manage liquidity gaps. The post-pandemic buoyancy could prompt entrepreneurs to use their past savings instead of borrowing at higher rates. Now that retail loans are costlier and prepayment of loans are without charges, some borrowers maintaining deposits may pre-close the loans which could further cut down the liquidity.
There are new savings options coming up with the proliferation of IPOs, diverse mutual fund products, and savings-linked insurance schemes. The number of Demat accounts has crossed 123 million and AUM of mutual funds has doubled since 2018 from ₹23 trillion to ₹46 trillion fast cruising towards ₹50 trillion mark. The faster pace of insurance reforms can potentially shift savings away from the banking sector.
The fall in the share of deposits under current and savings accounts (CASA) in banks has been from 43.68 per cent in FY22 to 42.75 per cent in FY23. The ALCO of banks while tackling the current liquidity gaps will have to adopt a multi-pronged approach to manage the liquidity risks on a more durable basis.
The writer is Adjunct Professor, at the Institute of Insurance and Risk Management – IIRM, Hyderabad. Views are personal