Indian banks are facing a new reality: tighter liquidity. This situation is forcing them to rely more heavily on debt markets to raise funds, resulting in higher borrowing costs.
Banks Lending
Data from April-June 2024 paints a clear picture. Compared to the same period last year, borrowings by banks through money markets and specific bonds surged by 60%. This shift in strategy is a direct consequence of the current cash crunch.
For years, banks enjoyed a period of easy access to liquidity. However, that era seems to be over. With tighter cash conditions, banks are now turning to debt markets to meet their funding needs. But this increased reliance comes at a price – the cost of borrowing is on the rise.
Banks Borrowing mega-merger
However, the story isn’t entirely black and white. The significant rise in bank borrowings can be partially attributed to the mega-merger of HDFC and HDFC Bank last year. Prior to the merger, HDFC operated as a non-banking financial company (NBFC). As a result, its borrowings weren’t reflected in overall bank borrowing figures. With the merger complete, HDFC’s borrowing liabilities are now consolidated within the banking sector, leading to a jump in the overall numbers.
Impact of HDFC Merger
Experts like Soumyajit Niyogi, director at India Ratings & Research, acknowledge the impact of the HDFC Bank merger. However, he emphasizes that the core issue remains – tighter liquidity. He highlights the situation in May, where government spending was restricted due to the Union elections, further exacerbating the cash crunch.
In conclusion, Indian banks are navigating a new landscape of tighter liquidity. This is leading to increased borrowing from debt markets and a rise in borrowing costs. While the HDFC Bank merger contributed to the jump in numbers, the core challenge lies in the current cash conditions. Banks will need to adapt their strategies to this new reality and find ways to manage their funding needs effectively.
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