RBI warns banks over heavy market borrowings

Expressing concerns over increased reliance of banks on non-traditional sources of funds, the Reserve Bank of India has said that high level of borrowed money could adversely impact their liquidity position.

"This increased reliance on borrowed funds raised concerns about the liquidity position of banks arising from growing maturity mismatches, in conjunction with a reduction in the share of liquid assets in total assets," RBI said in its Financial Stability Report released on Tuesday.

The banking sector balance sheet increased by 19 per cent during the year ended March 31, 2011, spurred by a robust growth of 22.6 per cent in credit off take.

The growth in deposit mobilisation, at around 18 per cent did not keep pace with the growth in credit.

The gap was funded by increase in funds accessed from market (certificate of deposits issuances and borrowings), which increased by 34.5 per cent over its position as at end of March, 2010,

it said.

The share of borrowings and CDs in banks' liabilities rose to about 10 per cent in 2011 from about 7.5 per cent in 2006, it said.

In particular, it noted, the period from October, 2010 to February, 2011, during which the systemic liquidity conditions were strained, witnessed increased CD issuances with interest rates rising to 9-10 per cent.

Increase in borrowings from market was particularly evident in the case of public sector banks and new private sector banks, it said.

At the current juncture, however, the reliance on market borrowings was not very significant in absolute terms, it said.

Also, it said, concerns were alleviated by the accessibility of banks to stable low cost deposits (current account and savings account -- CASA deposits), which stood at about 35 per cent of total deposits.