Long-term repo ops: Funds available, but will banks push credit?

Mumbai: India’s central bank may have offered cheap liquidity to lenders through long-term repo operations (LTRO), but the programme’s success depends on their ability to push credit, especially at a time when demand remains rather tepid and the industry’s retail focus raises concentration risks.

On Monday, the Reserve Bank of India’s (RBI) offer for Rs 25,000 crore of one-year money was subscribed 4.9 times. Monday’s bids follow the first LTRO auction for Rs 25,000 crore with a three-year tenor, which saw bids at 7.8 times the notified amount. This money is offered at the 5.15 per cent repo rate.

Nomura economists Sonal Varma and Aurodeep Nandi said though the RBI measures have been able to cool off bond yields, there are still doubts whether it will lead to higher credit availability.

“We doubt the credit channel will work, because the slowdown in credit growth is the result of weak supply and demand factors, such as higher credit risk premium due to a deteriorating economic and financial cycle. Moreover, banks need both liquidity and capital to be able to lend. Public sector banks lack enough capital and LTRO’s success will depend on the willingness of foreign and private sector banks to lend (mainly to retail borrowers),” Nomura said.

RBI’s push comes even as bank credit at 7.1 per cent is at a 58-year low. Nomura said that empirical evidence shows lending rates eased especially in some countries in Europe but loan growth remained weak, mainly because larger corporates cornered the benefit and banks used cheap funds to invest in higher-yielding government bonds.

Banks in India can technically borrow from RBI and invest in the 5.38 per cent one-year or the 5.73 per cent three-year government bonds. These securities can then be used to borrow more money to lend to other sectors.

Analysts said the comfort of long-term money will help banks deal with their asset-liability issues, but demand is the real problem.

“Funding is there but demand is not in the best of shape. Having said that, risk parameters in retail have also not shown any alarming signs as yet. We will have to wait and watch on how banks use these funds,” said Karthik Srinivasan, group head, financial sector ratings at ICRA.