Banking system: Covid-19 fallout: Rate transmission a far cry despite liquidity overhang

Mumbai: Surplus cash in the banking system has surged to as much as Rs 4.74 lakh crore, surpassing liquidity levels seen four years ago during the demonetisation period.

But, the liquidity glut is not bringing interest rates down, as risk-averse banks stay off from fresh loans amid an alarming Covid-19 scene.

“The entire liquidity could ignite credit expansion once normalcy is back,” Federal Bank executive director Ashutosh Khajuria said. “High liquidity is a good measure to prevent any collapse of a bank which has stress on the deposit front. For some banks, it prompts to lend.”

But, there is no demand for credit due to the Covid-19 situation, Khajuria said.

There was a net cash surplus, or liquidity, of Rs 4.41-4.74 lakh crore in the system in the second week of April, show data from the Reserve Bank of India.

A surge in the benchmark bond yield, a key gauge to price any bonds, indicates that the high liquidity has failed to bring down rates on longer-term papers.

The benchmark yield has gone up by 35 basis points since the unscheduled RBI policy meeting on March 27, pulling prices down.

“Unprecedented liquidity is an endeavour to make lenders generous,” said Soumyajit Niyogi, an associate director at India Ratings & Research. However, that ability to lend is not percolating into keenness to lend owing to multiple uncertainties. But, high liquidity is also seen as a good shock absorber at the time of crisis,” he said, adding: “In absence of normal activities, it is difficult to expect better rate transmission albeit sporadic.”

In a state bond auction, Kerala’s 15-year bonds yielded as much 8.96%, more than 200 basis points higher than equivalent sovereign papers.

The role of the central bank is now to restore market normalcy amid crisis, then look for rate transmission, dealers said.

Bank certificates of deposit rate with 12-month maturity has jumped 28 basis points since March 30, the day before the RBI cut its policy rate by a sharp 75 basis points, or 0.75 percentage point.

Most bank employees are now working from home unless it is branch banking. Such a set-up has crippled normal banking activities. This has resulted in thinning business activities.