An area of concern...

Banks ask RBI to infuse cash into system

Faced with an extreme liquidity crunch, banks have made a strong representation to Reserve Bank of India to release more cash into their system.

A request was also made for refinancing of oil bonds to provide funds to stateowned refiners who are one of the large borrowers. Bankers made this pitch in their first formal meeting with the new governor of the Reserve Bank of India (RBI), D Subbarao on Monday.

The demand for cash is visible in the huge borrowings by banks from RBI — banks collectively borrowed a record Rs 90,075 crore from the central bank on Monday, over both its liquidity adjustment facility windows. Borrowings from the RBI have been in the range of Rs 50,000 crore - Rs 80,000 crore over the past couple of weeks. Further, bankers present at the meeting indicated that they expect the demand to rise in the coming quarters.

“A number of corporates have lined up for credit and thus we will need to look at options to increase liquidity,” pointed out a senior banker to RBI. Demand for liquidity is in the context of increase in credit and rising cost of funds, which has risen by 26% year-on-year as against 20% projected by the RBI. Meanwhile, cost of funds have risen substantially with banks offering 10% on one-year retail deposits and about 11.75% on bulk deposits.

Bankers urged the RBI to allow them to offer higher interest rate on the NRI deposits . As of now, banks can not offer more than 50 basis points over Libor in NRE deposits and Libor minus 25 bps on FCNR (B).

Bankers also suggested that RBI could consider refinancing oil bonds held by banks. They also said that RBI could support banks in refinancing exporters in foreign currency loans. As of now, banks can not charge more than 100 bps over Libor for post shipment foreign currency loans. However, bankers are finding it tough to lend to exporters since their (banks) cost of fund is in the range of Libor plus 300-400 bps.

Interestingly, high demand is despite the RBI allowing banks to borrow twice in a day from them and an effective one per cent cut in the statutory liquidity ratio (SLR). Some banks once again urged RBI to consider giving some interest on cash reserve ratio- a slice of deposits that banks have to park with RBI. Banks have to park 9% of net liabilities with RBI as CRR, but it does not attract any interest.

A senior banker also suggested that RBI could consider excluding those loans extended to infrastructure sector from the CRR and SLR. Another senior banker suggested that RBI should once again allow banks to have floating reserves so that such reserves could be used during bad times and disclosure on the same can be made in their balance sheet. RBI had discontinued the practice of allowing banks to have floating reserves some time bank.

Besides the RBI governor, all four deputy governors were present in the meeting. Among PSU banks chairman of State Bank of India, O P Bhatt; CMD of Bank of India TS Narayanasami; CMD of Bank of Baroda MD Mallya; CMD of Canara Bank, AC Mahajan; CMD of Union Bank of India MV Nair; cheif of Axis Bank, PJ Nayak and cheif of Citi Sanjay Nayar attended the meeting.

Source: Economic Times, 30 Sept 08