Indian banks are navigating turbulent waters as they resort to massive selling of government securities to manage a worsening liquidity crunch. With credit growth dramatically outpacing deposit accumulation, financial institutions are making tough choices to keep the lending engine running.
The numbers tell a concerning story. According to recent data, banks have offloaded government securities worth a staggering ₹61,920 crore in just the first two months of the current financial year. This represents the highest selling spree witnessed in three years, signaling deepening stress in the banking system.
The Core Challenge: Credit-Deposit Mismatch
The fundamental issue lies in the widening gap between credit expansion and deposit growth. While bank credit has been growing at a robust 16.3% year-on-year, deposits have struggled to keep pace at just 13%. This 330 basis points difference is creating significant pressure on banks' liquidity coverage ratios.
"Banks are caught between rising credit demand and sluggish deposit growth," explains a senior banking analyst. "When you can't raise enough deposits to meet loan demand, selling government securities becomes the only viable option to raise immediate funds."
Impact on Banking Operations
The liquidity squeeze is manifesting in several critical areas:
- Liquidity Coverage Ratio (LCR) pressure: Banks are mandated to maintain high-quality liquid assets to cover potential outflows
- Rising funding costs: As liquidity tightens, the cost of borrowing between banks has increased significantly
- Strategic portfolio adjustments: Banks are rebalancing their investment books to optimize returns amid challenging conditions
RBI's Response and Market Dynamics
The Reserve Bank of India has taken note of the situation, with systemic liquidity slipping into deficit mode after a prolonged period of surplus. The central bank's variable rate repo operations have seen strong demand, indicating the severity of the cash crunch.
Market experts suggest that the trend might continue in the coming months unless deposit growth accelerates meaningfully. The upcoming corporate advance tax payments in mid-September could further exacerbate the liquidity situation.
Looking Ahead: Banking Sector Outlook
While the current scenario presents challenges, most analysts believe the situation is manageable. Banks have substantial holdings of government securities that can be liquidated if needed. However, sustained pressure could eventually impact profitability and lending rates.
The key monitorable remains deposit growth. Banks are increasingly focusing on retail deposit mobilization through special campaigns and higher interest rates to bridge the gap. The success of these efforts will determine how long the G-Sec selling spree continues.
