Govt's JIT plan for cash flows may trigger reset of liquidity variable

The road to JIT has involved tweaks to a system first introduced three years ago. In 2021, the government began a new model of cash management - the Single Nodal Agency (SNA) - that involved an SNA account set up with banks for the central sector and centrally sponsored schemes. Funds flowed into those accounts and payouts were made on the basis of identified treasuries by the scheme-implementing agencies. Importantly for banks, under this model, funds sit in the account for some time before payouts are made.

The Centre is now taking strides toward a model called the SNA 'SPARSH' system, which aims to bring about 'Just-In-Time' releases under centrally sponsored schemes and central and state consolidated funds.

A manufacturing industry invention, JIT began on the shopfloors of Toyota more than five decades ago to drastically slash inventory expenses and minimise the need for working capital in a business where a long sales cycle put a premium on restraining expenses to boost profitability.

Under the , instead of money getting routed through the commercial banks' nodal accounts, the Reserve Bank of India (RBI) will directly, through the integration of the central bank's 'e-Kuber' electronic platform, make the payments to the beneficiaries, bank treasury executives said.

States already onboarded to the SNA system include Rajasthan, Karnataka, and Odisha, while pilots are in advanced stages of implementation in Telangana, Jharkhand, Chhattisgarh, Assam, Gujarat, Bihar, and Andhra Pradesh, the Finance Ministry said in December 2023.

Accent on JIT
Under the - ministries and departments are supposed to release funds to the greatest extent possible in the JIT format, keeping the float of funds to the minimum possible.

Starting April 1, the settlement of unspent amounts of funds that the Centre sends to states through the SNA would happen within a day, removing the need to park it outside the government account for more than 24 hours, ET reported last month, citing government officials.

Coupled with the need to park aside funds as a precautionary measure amid the demands of 24x7 banking, a potentially tighter flow of funds from the government implies more possibility of deficit liquidity conditions in the system. Liquidity conditions are a major determinant of borrowing costs for banks, and therefore in the broader economy.

For much of the last financial year, banking system liquidity was in deficit mode, pushing up banks' cost of borrowing. Overnight money market rates were around 25 basis points higher than benchmark policy rates for six months, with a large build of government cash balances being cited as a key factor behind tight liquidity.

"If the states don't spend, neither do the Centre, and that means the money piles up with the RBI. We saw last year that there were certain periods of time when the surplus cash balance with the government was as high as ₹4.0 lakh crore to Rs 4.5 lakh crore," said Madan Sabnavis, chief economist at .

Under no circumstances are departments to release more than 25% of budgeted amounts earmarked for schemes at one time. Additional funds would only be released following utilisation of at least 75% of funds released earlier.