Demonetisation Leaves State Bank of India Scrambling To Deploy Surplus Deposits

The nation’s largest lender, State Bank of India (SBI), saw deposits worth Rs 1.65 lakh crore flow in after the government decided to scrap notes of Rs 500 and Rs 1000 on November 8. Citizens were given till end-December to deposit old notes. Restrictions were placed on withdrawal of new notes till mid-March. It was assumed that once withdrawal restrictions are removed, much of the deposits that came in would flow out.

If SBI’s experience is anything to go by, that is not how it played out.

Speaking on the sidelines of the bank’s quarterly earnings on Friday, the bank’s top management said that nearly 65 percent of the deposits that came in have stayed in the bank, at least so far. As a result, the bank saw its deposit base swell to over Rs 20 lakh crore as of March 2017, an increase of 18 percent over last year. Current account and savings account (CASA) deposits have grown by 24 percent.

The swell in deposits has come at a time when loan growth is at multi-decade lows, leaving the bank scrambling to find ways to deploy surplus liquidity.

“We were expecting a bigger outflow but the outflow is much less. It has helped us reduce our overall cost of funds, which is visible in the fourth quarter,” Rajnish Kumar, managing director for national banking at SBI told BloombergQuint on the sidelines of the earnings press conference.

Excess liquidity and the lower cost of funds has prompted SBI to reduce its one year marginal cost lending rate (MCLR) by 110 basis points (bps) since 30 September 2016 to 8 percent. A majority of this cut, about 90 bps, was announced on 1 January 2017, after the process of accepting old Rs 500 and Rs 1,000 currency notes was completed.

The lower rates, however, have not translated into much of a pick-up in credit demand. This is partly because demand for loans from industry is weak and also because lenders remain cautious about lending to a number of stressed sectors.

Kumar says he is hopeful that the excess liquidity and lower rates will come in handy when demand for loans picks up.

Also Read: A New (Tough) Start For State Bank Of India

Parking Funds In Bonds

In the meantime, the bank is deploying excess funds in corporate bonds and commercial paper, Kumar said.

According to data available in the bank’s analyst presentation, the bank added investments worth Rs 45,557 crore in commercial paper and Rs 18,484 crore in corporate bonds in the last financial year.

Indian firms raised a record amount of funds from the corporate bond markets in fiscal 2017. According to data from the Securities and Exchange Board of India (Sebi), Rs 6.4 lakh crore was raised through the private placement of corporate bonds last year.

By investing in this paper, via its investment book, SBI ensures that it continues to get a share of the credit demand in the economy, albeit indirectly.

Mopping Up Extra Liquidity

The problem of excess liquidity, and the lack of avenues to deploy it, isn’t limited to SBI. At the system level, deposits rose by 10 percent between 30 September to 31 December 2017.

The RBI has been slowly mopping up the excess liquidity through tools like the issue of bonds under the Market Stabilization Scheme (MSS). Still, the system is carrying surplus liquidity. According to a May 22 report from Kotak Economic Research, the weekly average surplus is running at about Rs 3.13 lakh crore.

Soumyajit Niyogi, associate director at India Ratings & Research believes that the surplus liquidity created by demonetisation may come in handy as the government embarks on another structural change - the implementation of the goods and services tax (GST).