The country's largest bank, the State Bank of India (SBI), is sitting on high liquidity ratio of 143 per cent, which implies the bank is either risk averse or there is a lack of lending opportunity. Also, the bank could also be making investments in safe haven low yielding government securities.
The Reserve Bank of India's regulatory minimum for liquidity coverage ratio (LCR) is 100 per cent for March 2020. This ratio has been further brought down to 80 per cent post coronavirus outbreak to provide more lendable resources to banks. But the SBI has recently reported 143 per cent LCR for March 2020.
Given the regulatory minimum of 80 per cent in the current year, the largest bank is closer to double at 143 per cent.
The LCR is computed by dividing the short term liquid assets by the total expected cash outflows over the next 30 days. Most banks historically keep a 15-20 per cent higher LCR than the regulatory minimum as anything beyond means the banks is either sitting on surplus liquidity or investing in government securities.
In the run up to Yes Bank debacle, private sector banks were forced to keep a higher LCR to meet any liquidity outflow by way of a sudden deposit withdrawals. During that period, some private banks were keeping a LCR of over 130 per cent.
A higher LCR also shows risk aversion on the part of a bank. SBI Chairman Rajnish Kumar recently countered this in a CII event where he said that there is a risk aversion amongst borrowers too. "I have money, but there are no takers," said Kumar. The credit off take has been an issue for the last many years.
While the banks are cautious, the corporate sector is also not on expansion mode as existing capacity utilisation is still low. Clearly, the liquidity ratio for the SBI and many other banks is expected to remain high because of lesser opportunity to lend in the market. The economy has already lost three months and returning to normal operations would take a minimum of six months to a year.
The only option for banks is to invest in G sec, which in a way is a god send opportunity for government (both central and states) as they have lined up a borrowing programme in 2020-21.
There is a lending opportunity window open in the MSMEs and agri space where the government wants banks, especially PSBs, to invest. There is already a Rs 3 lakh crore government guarantee for additional loans to MSMEs. This will bring some growth in lending.
In addition, the six months moratorium on term loans will also automatically increase the outstanding lending book by 1.5-2 per cent as accrued interest would get added to outstanding loans.
Faced with high liquidity, banks are already resorting to cutting deposits rates for both savings and the term deposits. The SBI has reduced savings rate to a minimum of 2.70 per cent for a year. Banks are also very active in the private bond market where good quality corporates are raising money at 6-7 per cent.
The banks are also willing to park their money for a short term of 1-3 years in the debentures of triple A rated corporate.