Cash shortages in banking system at record levels

MUMBAI: Banks in India are facing a severe shortage of cash, which has now reached record levels. This is because money goes out for tax payments and less government spending. Traders expect the central bank to inject more cash to ease the shortage.

According to Reserve Bank data, by January 23, the shortfall widened to Rs. 3.34 trillion ($40.18 billion), nearly three times higher than at the beginning of the month. The increase in losses is due to the rise in tax collections and the decline in government spending seen in recent months.

Indian banks are urging the RBI to ease the cash crunch. Because the overnight cash rate is higher than the policy rate. So far, the central bank has used short-term repo auctions to inject cash into the banking system, but avoided injecting money for the long term.

The RBI is likely to maintain a cash shortage in the short term, but the shortage will gradually ease in the future, sources said. A further neutralization of liquidity conditions will be seen as a sign that interest rates may fall. Earlier this month, RBI Governor Shaktikanta Das said it was premature to discuss changes in monetary policy until inflation remained high.

RBI will continue to increase VRR to meet demand for cash. It is expected that the overnight rate will be equal to the repo rate by the end of March or early April, as government spending usually increases before the end of the fiscal year.

Increase in banks' loan growth estimates

Rating agency Iqra has increased the estimate of growth in loans given by banks in the current financial year 2024 from 14.9 to 15.3 percent. The agency had earlier projected a growth of 12.8 to 13.0 percent. This estimate has been made keeping in mind the increase in retail loans and loans by non-banking financial companies.

Iqra said that during the nine months ended December 2023, there was an increase in retail loans and loans extended by banks to NBFCs, which led to the change.

Increased debt of Rs. It is estimated to be 20.4 to 20.9 lakh crore, while earlier in FY24 it was Rs. 17.5 to 17.8 lakh crore was estimated.

This will be the highest bank credit growth ever and is higher than the previous Rs. 18.2 lakh crore will cross the high level. In FY23, there was an annual growth of 15.4 percent. Iqra estimates that corporate bond issuance in 2024 will reach Rs. 9.6 to 9.9 lakh crore will reach.

However, the rating agency warned that loan growth could slow to 11.7 to 12.6 percent in the next fiscal year 2025 due to challenges in attracting deposits.