Banks continue to park surplus funds with RBI, earn profits of 50-100 basis points a day

Last week the Reserve Bank of India (RBI) had cut reverse repo rate by 25 basis points, the funds which banks park with RBI. In spite of the cut the options seems to be attractive among the banks.

Banks, especially Government owned, borrow against their excess holdings of government securities at a lower rate under Clearing Corporation’s Collateralized Borrowing and Lending Obligation (CBLO) mechanism and invest these funds at a higher rate with RBI.

By doing so banks are making profits of 50-100 basis points a day.

For instance: On Monday a bank borrows against its surplus government securities holding at the biased average interest rate of 2.72 per cent under CBLO and invest funds at RBI’s Reverse Repo (R/R) window at 3.25 per cent. Therefore bank makes gain of 53 basis points (100 basis points equals 1 per cent) in just a day.

However CBLO is a discounted money market device which allows banks and other market participants to borrow and lend funds via electronic book entry. It inflicts a responsibility on the borrower/lender to return the money borrowed/receive the money lent, at a specified future date. The principal charge on securities is held back (with CCIL) for the amount borrowed/lent.

As per banking sources, the central bank on April 21 had reduced the reverse repo rate with an aim to encourage banks to lend to the productive sectors of the economy. But, due to slack credit off take, banks with surplus Statutory Liquidity Ratio (SLR) portfolio are making the most of the arbitrage opportunity due to differential in the interest rate between CBLO and RBI’s R/R window.

In spite of the reverse repo rate cut, during the last four working days after the RBI’s rate cut, banks, on an average, have invested around Rs 1 lakh crore daily with the RBI.

As of March-end 2009, listed commercial banks’ investment in Statutory Liquidity Ratio (SLR) securities — the segment of net demand and time liabilities (NDTL) that banks have to park in government securities has increased to 28.1 per cent from 27.8 per cent a year ago.

As per RBI records Banks, as of March-end 2009, were holding excess government securities worth Rs 1,13,817 crore or 2.7 per cent over the prescribed SLR of 24 per cent of NDTL.

In view of that at the beginning of April CBLO has witnessed rates as low as 0.50 per cent, thus banks would have made a huge earning a clean return of 3 per cent in just a day.

A senior public sector bank official explained, “Feeble credit offtake coupled with the fear of bad loans going up in the current scenario of economic slowdown is prompting banks to park their surplus funds with the RBI. Not many bankable loan proposals are coming our way. So, it’s a Hobson’s choice for us.”

As per RBI’s statistics, scheduled commercial banks have together disbursed Rs 1,429 crore in the fortnight ended April 10, 2009. This, bankers believe, is an indication of a slowdown.

Market players believe that banks continue to flood the central bank’s reverse repo window with surplus liquidity in spite of the cut in the interest rate, therefore the regulator might move to limit surplus funds the banks park by imposing a cap.