The pressure follows the Reserve Bank of India’s decision to raise the repo rate to 5.50 per cent and tighten banks’ daily cash reserve maintenance requirements.
Banks whose loan growth is outpacing deposit mobilisation could face higher funding costs as banking system liquidity tightens, while non banking financial companies (NBFCs) dependent on bank borrowing and wholesale funding may face pressure on margins.The pressure follows the Reserve Bank of India’s decision to raise the repo rate to 5.50 per cent and tighten banks’ daily cash reserve maintenance requirements. From the fortnight beginning October 16, banks must maintain at least 99 per cent of their prescribed cash reserve ratio (CRR) on a daily basis, compared with 90 per cent earlier. The RBI has also scheduled a Rs 25,000 crore sale of government securities on October 13 to absorb liquidity.Bank of Baroda and Axis Bank have reported faster loan growth than deposit growth in Q2FY27, while HDFC Bank’s faster deposit mobilisation provides a relatively stronger buffer on this measure.
Bank of Baroda’s advances grew 18.3 per cent year on year in Q2FY27, compared with deposit growth of around 16.8 per cent. At Axis Bank, advances rose 22.7 per cent, outpacing deposit growth of 20.7 per cent. The divergence could increase the need for these banks to mobilise additional deposits or tap market funding if credit growth remains strong.HDFC Bank reported deposit growth of 18.8 per cent, ahead of 16.3 per cent growth in advances. Bank of India also reported deposit growth of 21.6 per cent, exceeding its 20.4 per cent loan growth. These growth differentials indicate relative funding requirements, but do not by themselves establish that any bank is facing a liquidity shortage.
NBFCs face higher borrowing costsFor NBFCs, the pressure could emerge through higher borrowing costs if tighter banking system liquidity raises the cost or reduces the availability of bank funding. Lenders that rely heavily on bank loans, certificates of deposit or other wholesale funding could be more vulnerable than those with diversified funding sources. NBFCs with fixed rate loans may find it difficult to pass on higher funding costs quickly, potentially squeezing margins.Banking system liquidity stood at a surplus of Rs 3.88 lakh crore, according to a report published on October 9. The weighted average call rate was 5.31 per cent on October 9, below the 5.50 per cent repo rate. The immediate impact will depend on how quickly the surplus declines, banks’ deposit mobilisation and their reliance on short term funding. If liquidity remains tighter for an extended period, funding costs could rise and the pressure could spread to lending rates and NBFC margins
