Parking surplus funds with the Reserve Bank of India continues to be an attractive option for banks despite the 25 basis points cut effected in the reverse repo rate last week.



Banks, particularly Government owned, are borrowing against their surplus holding of government securities at a lower rate under Clearing Corporation's Collateralised Borrowing and Lending Obligation (CBLO) mechanism and deploying the funds at a higher rate with RBI.

By doing so, banks are making a tidy spread of 50-100 basis points a day.

Consider this: If a bank had borrowed on Monday against its surplus government securities holding at the weighted average interest rate of 2.72 per cent under CBLO and parked the funds at RBI's Reverse Repo (R/R) window at 3.25 per cent, it stands to make a gain of 53 basis points (100 basis points equals 1 per cent) in just a day.

CBLO is a discounted money market instrument which enables banks and other market participants to borrow and lend funds via electronic book entry. It imposes an obligation on the borrower/lender to return the money borrowed/receive the money lent, at a specified future date. The underlying charge on securities is held in custody (with CCIL) for the amount borrowed/lent.

According to banking sources, the central bank had cut the reverse repo rate on April 21 with the express intention of pushing banks to lend to the productive sectors of the economy. However, due to slack credit offtake, banks with surplus Statutory Liquidity Ratio (SLR) portfolio are making the most of the arbitrage opportunity thrown up by the interest rate differential between CBLO and RBI's R/R window.

Notwithstanding the reverse repo rate cut, during the last four working days after the RBI's rate cut, banks, on an average, have parked around Rs 1 lakh crore daily with the RBI. As of March-end 2009, scheduled commercial banks? investment in Statutory Liquidity Ratio (SLR) securities ? the slice of net demand and time liabilities (NDTL) that banks necessarily have to park in government securities ? increased to 28.1 per cent from 27.8 per cent a year ago.

Banks, according to RBI, 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. Considering that at the beginning of April CBLO has seen rates as low as 0.50 per cent, banks would have made a killing, earning a clean return of 3 per cent in just a day.

?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,? said a senior public sector bank official.

As per RBI's statistics, scheduled commercial banks have collectively lent Rs 1,429 crore in the fortnight ended April 10, 2009. This, according to bankers, is an indication of a slowdown. Pointing out that banks continue to flood the central bank's reverse repo window with surplus liquidity despite the cut in the interest rate, market players feel that the regulator may move to curtail the tendency of banks to park surplus funds by imposing a cap.

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