Bank borrowings through money markets and certain types of bonds jumped 60% from a year earlier during April-June as tighter cash conditions compelled lenders to take the debt route to raise money, with the cost of funds rising after a multi-year era of easy liquidity came to an end.
The merger of HDFC and HDFC Bank last year also contributed to the sharp increase in the numbers, as the borrowing-led liabilities of the erstwhile non-banking financial company started showing up in the overall bank borrowing data after July 14, 2023.
The latest fortnightly data released by the Reserve Bank of India showed that in April-June – up to June 14 – the average bank borrowings were at ₹7.71 lakh crore, compared with ₹4.80 lakh crore in the comparable period a year ago.
Figures listed under the ‘borrowings’ section for scheduled commercial banks in the fortnightly RBI data largely represent short-term funding routes, such as interbank repo operations and the use of tri-party repos, analysts said. Instruments such as additional tier-1 bonds and infrastructure bonds are also included in bank borrowing data, but certificates of deposits are not.
“To a certain extent, the year-on-year rise in the bank borrowing numbers is a reflection of the merger between HDFC and HDFC Bank. But apart from that, it is clearly a reflection of the tightness in the liquidity and that was, to a certain extent, exacerbated in the month of May because government spending was restricted during the Union election,” said Soumyajit Niyogi, director at India Ratings & Research.
Liquidity in the banking system, as measured by fund injections by the RBI, was at a deficit every single day from May 1 to May 30, with the average daily borrowing from the central bank at ₹1.42 lakh crore during that period.
Barring May and July 2023, the weighted average call rate (WACR), which determines cost of borrowing for banks in the money markets, was 20-25 basis points higher than the RBI’s repo rate from August 2023 to January 2024. This was due to the progressive tightening of liquidity conditions in the banking system amid the RBI’s stance of withdrawing monetary accommodation.
Liquidity conditions tightened as a result of bank credit growing faster than deposits, sporadic actions by the RBI in the foreign exchange market to prevent excess volatility in the rupee’s exchange rate, and the need for banks to keep aside large amounts of precautionary cash in the age of 24×7 banking obligations.
The higher cost of funds over the past year has exerted an impact on banks’ net interest margins with their credit-deposit (CD) ratios rising sharply. The CD ratio refers to the portion of loans that banks give out from the deposits they have raised.
