New Delhi/Mumbai, October 15
The government and the RBI have once again announced fresh measures to infuse liquidity into the system.
Elaborating on the measures taken, finance minister P. Chidambaram said the government would provide Rs 25,000 crore as first installment (against the farm debt waiver scheme) to commercial banks, Regional Rural Banks, and cooperative credit institutions. The RBI has agreed to provide this sum with immediate effect. Of the Rs 25,000 crore, commercial banks will get Rs 7,500 crore and Nabard Rs 17,500 crore. The banks will get this liquidity without providing any collateral.
The Reserve Bank fed the banking system yet another Rs 40,000 crore through a one per cent cut in banks' mandatory cash deposits.
Major banking sector players said they would assess the situation and response of the market before taking a call on cutting interest rates, even though the second largest public sector bank PNB slashed its retail lending rates by half-a-per cent even before today's reduction in CRR.
In addition to this, the government has also taken measures to provide liquidity in money market by doubling the limit of investment by foreign institutional investors (FIIs). Henceforth, FIIs can invest up to $6 billion in corporate bonds as against $3 billion earlier.
Experts say this will help cash-strapped corporates to raise more money from yet another avenue besides the banks and provide them the much-needed liquidity. However, the concern still remains as the FIIs are not really waiting to park their surplus money in Indian corporates as there is not much liquidity abroad either, say experts. This is at best a long or a medium-term solution, the experts say.
Allaying fears of credit crunch, the finance minister once again said “our banks are well capitalised”. The finance minister revealed the capital strength of the banks by saying that the capital adequacy ratio of Indian banks was well above the international requirements (Basel norms) of 8 per cent. However, Indian banks have capital adequacy ratio of above 9 -10 per cent, as is required by the RBI.
Nevertheless, the government has decided to provide the banks access to finance in order to raise the capital adequacy ratio, which will strengthen them further and bring the CAR to around 12 per cent.
The minister added that RBI has already issued an advisory to the banks to enable smooth flow of credit to borrowers of term loans as well as working capital. The government is also issuing an advisory to public sector banks to ensure easy drawdown against sanctioned limits, appraise promptly requests for enhancement of credit limits, and continue to participate actively in the inter-bank call money market, the minister clarified.
The RBI Governor had met Prime Minister Manmohan Singh yesterday to brief him about the financial situation with particular reference to the liquidity position. The RBI Governor also apprised
the Prime Minister of developments and measures taken by other countries, the finance minister said.
"RBI is monitoring developments in the financial markets closely and continuously and would respond swiftly and even preemptively to any adverse external developments impinging on domestic financial stability," the apex bank said announcing release of Rs 40,000 crore through cut in CRR to 6.5 per cent.
Similar cuts announced by RBI since October 6 has injected a whopping Rs 60,000 crore and along with today's development, banks would get Rs 1,00,000 crore.
RBI's liberal measures came on a day when stock markets tanked close to 700 points, ending a two-day winning streak that came on the back of government's reassurance that it was continuing to fight the liquidity problems.
RBI Governor D Subbarao returned from New Delhi after holding discussions with the Prime Minister and the Finance Minister on options to combat the liquidity crunch caused by the global financial meltdown.
Continuing to feed the insatiable appetite of the system, the finance minister announced that foreign institutional investors would be allowed to double their limit to $ 6 billion in the corporate bond market.
In addition, both the RBI as well as the government took steps to give benefits to the depositors, especially non-residents. Besides, finance minister P. Chidambaram pledged full support to banks for accessing funds to raise their capital adequacy ratio to 12 per cent.
Pointing out that the continuing uncertain global situation is having an indirect impact on the financial situation, the RBI said the CRR cut would be effective for the fortnight beginning October 11, a decision that would immediately release Rs 40,000 crore for the banking system.
The Central Bank further said Rs 20,000 crore repo auction facility to enable banks to meet liquidity requirements of mutual funds will continue till the entire amount is auctioned. The banks have drawn only Rs 3,500 crore from the scheme on the first day of opening of the addition repo window by the RBI yesterday.
The Central Bank further said similar facility will be made available for the oil bonds which were instituted under the Special Market Operations (SMO) for public sector oil marketing companies in June-July earlier.
In order to lure non-resident deposits, the RBI has increased the interest rate ceiling by 50 basis points on FCNR(B) and NR(E)RA deposits.
The RBI today took the following measures to increase flow of money into the system:
- CRR is cut by 1 per cent to inject Rs 40,000 crore
- To provide Rs 25,000 crore to banks against their outgo on farm debt waiver
- To double the limit of FII investment in corporate bonds to $6 billion
- To provide banks access to finance for raising Capital Adequacy Ratio to 12 per cent
- To keep the RBI's window for mutual funds open till Rs 20,000 crore is exhausted
- To issue advisory to PSU banks to give credit against sanctioned limits
- To ask PSU banks to continue to actively participate in call money market
- To increase the interest rate ceiling on non-resident deposits denominated in foreign currency by 50 basis points
- To increase interest rate ceiling on non-resident deposits denominated in rupee by 50 basis points
- To allow banks to borrow funds from their overseas branches up to an increased limit of 50 per cent of their capital.
— PTI
