Indian banks are in the grip of a liquidity deficit which, senior bankers describe, can be called the most acute in the past 10 years. A Bloomberg Economics Index revealed that cash deficit on January 23, 2025 was recorded at Rs 3.3 lakh crores (or $38.2 billion), which is the highest level since at least 2010. According to reports, the situation is so acute that the daily variable repo rate auctions the central bank was conducting for the past few days has not been of much help to ease the situation.
What is the liquidity crisis in banks? A liquidity crisis in any bank is worrisome because sends the signal that it does not have enough readily available cash to meet immediate withdrawal requests from depositors, and it cannot lend to industry, which can tell upon economic growth. In other words, it is a measure of cash in bank accounts and resources required to meet short-term payment obligations. “There is no liquidity in the system, the deposit growth is slow, there are elevated levels of stresses, rupee has depreciated.. So, there are some factors at play which could impact this growth (of Axis Bank) going forward next year,” Axis Bank CEO Amitabh Chaudhry was quoted in the media as saying.
Liquidity concerns in NBFCs too
Acute liquidity concerns were heard from the NBFC non-banking finance companies) sector too. One of the largest NBFCs in the country, Bajaj Finserv, told the media that it is impacting them too. “Keep in mind that a large part of our system and our credit that goes into tier-2 and tier-3 certain segments and below is from NBFCs. These are large NBFCs, some of them bigger than banks. We need to make sure same kind of liquidity lines are created for us,” Sanjiv Bajaj, the chairman and managing director, Bajaj Finserv told a news channel.
RBI steps to tackle the situation
Addressing the liquidity concerns, India’s central bank said on January 15 said it would begin variable repo rate (VRR) auctions. These would be conducted on all working days of the week. Through these auctions banks are able to borrow funds from RBI by pledging government securities. This week (beginning January 20), RBI pumped in more than Rs 1.45 lakh crore through two overnight VRR auctions. According to reports, Rs 2 lakh crore flowed in through an overnight VRR auction along with a 14-day auction that brought in Rs 1.75 lakh crore on January 24.
SBI view on liquidity constraint
State Bank of India (SBI), however, refuses to describe the liquidity crisis as a pressing constraint. “The regulator has taken some measures to improve liquidity, particularly daily VRR (variable rate repo), which sent a signal to market that liquidity support from the central bank will always be available… We are able to see the change in the market perception in terms of the liquidity availability. While the system liquidity is still tight and there is deficit, but the availability of on tap liquidity from RBI definitely is a good indicator. Our view is that the way global economy is behaving, a rate cut is imminent in February,” SBI Chairman Setty told a news platform in Davos at the World Economic Forum (WEF) annual meeting.
In 2024 one of the biggest crises of Indian banks was a liquidity crunch, which was attributable to factors such as high inflation, slackening credit growth, and a worsening credit-deposit ratio. Though RBI reduced the SRR (cash reserve ratio) and conducted repo rate auctions, the problem still continues to pose headaches for the banking sector. Liquidity crisis adversely impacts a bank’s ability to lend which is crucial for economic growth of a country. Economy Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
