Indian banks have made $3.1 billion just by parking funds with the RBI — instead of giving them out as loans

Indian banks have been parking funds with the RBI instead of giving them out as loans despite the cut in repo ratesBCCL

  • The Reserve Bank of India (RBI) may have slashed repo-rates but Indian banks are still parking their funds with the central bank instead of giving them out as loans.
  • They’ve reportedly made ₹23,500 crore ($3.1 billion) collecting on interest.
  • Brickwork Ratings estimates that if Indian banks had given the ₹700,000 in loans instead, they could have more than doubled their earnings.
Indian banks have made nearly ₹23,500 crore ($3.1 billion) by parking their funds with the Reserve Bank of India (RBI) during the lockdown even as the repo-rate was cut to the lowest that it has been in over two decades.

RBI has been pushing monetary measures to increase the money supply in the economy in hopes that banks would use that money to give out more loans. However, their strategy seems to have backfired. Instead of extending credit, the rate cuts have only resulted in banks parking even more money with the central bank, according to a Brickwork Ratings (BWR) Report.

The excess funds parked with the RBI nearly doubled during the lockdown from ₹1.5 crore on 31 December to ₹3.8 lakh crore in March — to another ₹7.2 crore as of May 21. “Despite concerted efforts by the RBI, banks’ high-risk perception of the current economic environment continues to be a dampener in stepping up credit to India Inc,” said Vydianathan Ramaswamy, the director of BWR.
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Funds ₹700,000 crore
Reverse repo rate3.35%
Banks earnings₹ 23,450 crore

BWR estimates that had ₹7 crore been given out as loans to corporates, the banks could’ve more than doubled on their return hitting ₹57,445 crore ($7.59 billion). That’s an additional ₹ 34,000 crore.

Funds₹ 700,000 crore
Weighted average lending rate12%
Weighted average default rate5%
Recovery rate33%
Internet earned₹ 82,343 crore
Credit cost₹ 24,898 crore
Banks earnings [interest earned - credit cost]₹ 57,445 crore

The only way to switch the script on banks and actually get them to funnel their extra towards lending to businesses is by cutting the reverse repo rate down so far, that it no longer makes sense for them to invest with the RBI. “The reverse repo has to be brought down sharply and very close to the saving deposit rates offered by banks. This will dissuade banks from parking funds with the RBI and they will start looking for credit deployment while pricing the risk appropriately,” said Rajat Bahl, the chief ratings officer with BWR.
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