Banks and non-banking financial companies (NBFCs), which rely heavily on short-term funds to lend, are likely to be hurt the most by the Reserve Bank of India’s (RBI) steps on Monday to boost rupee demand.
The RBI put a 1% daily limit on borrowing on banks’ net demand and time liabilities, or about Rs 75,000 crore. It also raised the cost of borrowing by 200 basis points under its exceptional window, known as marginal standing facility or MSF.
Wholesale funded entities, banks with high loan-to-deposit ratios and those with high asset-liability mismatch will be the worst impacted as they will be forced to curb asset growth, apart from facing pressure on margins, wrote Credit Suisse analysts Ashish Gupta and Prashant Kumar in a note on Tuesday.
Given the constraints on liquidity in the system, certificate of deposit (CD) rates are expected to trend higher, impacting banks like YES Bank, Kotak Mahindra Bank, Bank of India and Canara Bank which are highly dependent on wholesale markets for borrowing. It will also impact banks like IndusInd Bank that have high loan-to-deposit ratios.
Credit Suisse has downgraded IndusInd and Kotak to ‘underperform’. YES Bank, Kotak and Bank of India have wholesale deposit exposures of more than 10% of their total deposits, according to their last fiscal balance sheets.
Longer-term loans against short-term deposits have aggravated asset-liability mismatches in the banking industry which is already putting pressure on liquidity. With loan growth outpacing the weak deposit growth, coupled with the RBI’s measures, monetary transmission is going get more difficult, experts said.
Banks will also take a hit on treasury gains with yields going through the roof with the change in policy stance, they said. Banks could also see bad loans rise, if liquidity gets really scarce and banks are compelled to borrow heavily despite high rates in the wholesale or call money market.
“The RBI is likely to wait for rupee stabilisation now,” said Samiran Chakraborty, research head at StandChart. “We believe Monday’s measures may remain in place for anywhere between one and six months.”
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