BANKS SMELL PROFIT BY BORROWING FROM RESERVE BANK OF INDIA'S REPO WINDOW

Banks are seeing an arbitraging opportunity by borrowing from the Reserve Bank of India and investing in higher yielding short-term instruments like one-month certificate of deposits and one-month commercial papers. In the current market, one month certificate of deposits are now traded at 9.20% while one month commercial papers are being traded at 9.50%.

On the other hands, banks can borrow from RBI's repo window at 8.25% on an overnight basis against government securities. The traded volumes in the CD market also jumped to Rs 12,434 crore on September 23 from Rs 6,480 crore on September 13. In the last few days, banks on an average have borrowed Rs 67,000 crore from the Reserve Bank of India's repo window.

This is despite the fact that the banking system is flush with incremental deposits worth Rs 3,14,000 crore (6%) so far this year, compared with a fresh loan disbursal of Rs 1,32,000 crore (3.4%). "Banks which hold surplus SLR of 2-3% can avail funds from the repo facility(8.25%) and utilise the funds for short-term investment in commercial paper or certificate of deposits and earn a clean spread of above 1%," said Roy Paul, DGM, Federal Bank.

The excess SLR, or statutory liquidity ratio - the portion of deposits that needs to be parked in government bonds, in the system is about 7%. The entire banking sector has invested about 31% of its deposits in bonds against the stipulated 24%.

"As the quarter end approaches, money market instruments such as certificate of deposits factor in the quarter end in a premium because credit demand picks up and banks need to shore up their interest income," said a senior treasury official with a private bank, requesting anonymity. The amount borrowed by banks from RBI's repo window, indicates the liquidity situation in the banking system.

The repo borrowing has risen steadily in the past one week, in spite of robust deposit mobilisation. Banks borrowed Rs 78,565 crore on Tuesday from the central bank. This is partly because it is the beginning of the reporting fortnight. Another reason, traders point out is that banks, with excess holding of government securities, are using funds borrowed from RBI to invest in high-yielding certificate of deposits and commercial papers.

SOURCE: http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/banking/banks-smell-profit-by-borrowing-from-reserve-bank-of-indias-repo-window/articleshow/10148637.cms