Finance

Published: Mar 15, 2023
Updated: Mar 15, 2023

Bank Borrowings Surge to Record High in FY23 as Liquidity Shrinks ; Reliance on short term funds increases

Bank borrowings have reached an all-time high in the current financial year, crossing the Rs 5 trillion mark for the first time. The surge in bank borrowings is due to the tightening of liquidity conditions and booming credit growth, leading to a higher reliance on short-term funding. According to RBI data, bank borrowings averaged Rs 4.2 trillion this year, compared to Rs 2.6 trillion in the previous financial year. Analysts have flagged the widening gap between bank credit growth and deposit growth as a factor contributing to this phenomenon. Banks will have to look for more stable solutions, such as higher deposits, as reliance on short-term borrowings cannot be sustained.

Liquidity Landscape Shrinks as Credit Growth Booms

The liquidity surplus in the banking system has shrunk from Rs 7.4 trillion in April 2022 to Rs 1.6 trillion in December-January, indicating a structural change in the liquidity landscape. Bank borrowings have seen a surge due to a change in liquidity conditions brought about by much lower surplus cash and booming credit growth. Liquidity conditions are expected to tighten significantly in the latter half of March, leading to elevated bank borrowings in the remaining two fortnights of this financial year.

Factors Contributing to the Surge in Bank Borrowings

The surge in bank borrowings reflects short-term funding routes, such as interbank repo operations and the use of tri-party repos, as well as issuances of additional tier-1 bonds and infrastructure bonds. The persistence of the wide gap between bank credit growth and deposit growth is another factor contributing to the surge. Banks cannot lend on the basis of short-term borrowings, and long-term borrowings, such as bonds, are more sustainable.

Effect of Tighter Liquidity

The weighted average call rate (WACR) has risen in late 2022 as the surfeit of cash has dwindled, resulting in an increase in short-term borrowing costs for banks. In 2020 and 2021, banks' overnight borrowing costs were below the repo rate, but in July 2022, the WACR started to trend sustainably above the repo rate, leading to episodes where the rate was at or above the Marginal Standing Facility.

Banks need to look out for more stable solutions like higher deposits

The surge in bank borrowings in the current financial year reflects a change in the liquidity landscape brought about by much lower surplus cash and booming credit growth. With liquidity conditions expected to tighten, banks will have to look for more stable solutions, such as higher deposits, as reliance on short-term borrowings cannot be sustained