Bank heads ask RBI to slash reserve norms- Business News
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Banks ask RBI to slash reserve norms

Banks on Monday asked the RBI to slash reserve requirements in the third quarter review of its monetary policy on January 25.

  • Mumbai,  January 12, 2011  
  • |  
  • UPDATED   09:04 IST

Facing severe scarcity of funds for undertaking lending activity, banks on Monday asked the Reserve Bank of India (RBI) to slash reserve requirements in the third quarter review of its monetary policy on January 25.

Economists expect the RBI to raise policy rates - repo (at which it lends to banks) and reverse repo (at which it pays to banks on overnight deposits) rates - by at least 0.25 per cent, to stem inflation. Food price inflation has surged by 18 per cent for the 12 months ended December 25, 2010, overturning expectations that the wholesale price index (WPI)-based inflation would come closer to RBI's projection of 6.5 per cent by end-March 2011. Monthly WPI inflation has come down to 7.48 per cent for November 2010 but is projected to look up in December.

Money matters

  • Rs 1L cr short-term funds borrowed by banks from RBI on a daily basis in Nov & Dec 2010
  • Economists expect RBI to raise repo and reverse repo rates to stem inflation
  • Credit demand is picking up but banks don't have funds to lend
  • A 0.25% cut in CRR from 6% level now would release over Rs 12,000 cr lendable resources
  • After RBI had slashed SLR in the recent policy review it has come down to 24%
  • 1% cut in SLR would bolster lendable funds by Rs 48,000 cr
  • Daily borrowings by banks are down to Rs 77,940 cr but is still higher than the RBI set figure of Rs 48,000 cr
In a customary pre-policy meeting with RBI officials, bank chiefs said that credit demand was picking up in the economy, but there are no sufficient funds to undertake lending activity. Chiefs of State Bank of India, ICICI Bank, HDFC Bank, Bank of Baroda and Union Bank of India, among others, participated in the meeting.

"We requested the RBI to reduce both cash reserve ratio (CRR) as well as the statutory liquidity ratio (SLR) though we admitted that inflation is a big concern. We see inflation at seven per cent by the fiscal-end, that is, 50 basis points (bps, 100 of which equals one per cent) above RBI's estimates for this fiscal," said K. Ramakrishnan, chief executive of the Indian Banks' Association (IBA) after the meeting.

CRR is a portion of the deposits kept by the banks with the RBI so that they can dip into it in times of exigency. A 0.25 per cent cut in CRR from the present level of six per cent would release over Rs 12,000 crore of lendable resources to banks. The highest rate at which RBI had slashed CRR was 0.5 per cent. After RBI had slashed SLR (a portion of deposits to be invested in specified securities, including government bonds) in the recent policy review by one per cent to bolster availability of funds in the banking system, it has come down to 24 per cent. Each per cent cut in SLR would bolster lendable funds by Rs 48,000 crore.

Banks continued to borrow over Rs 1 lakh crore of short-term funds from the RBI on a daily basis in November and December 2010. The situation improved only at the end of December 2010, bringing down the daily borrowings by banks to Rs 77,940 crore on Tuesday. Still, these borrowings are higher than the RBI set figure of Rs 48,000 crore.

Lending by banks has been growing at 23.7 per cent, while deposit growth has remained sluggish at 14.7 per cent as on December 17, 2010, compared to the figures in the corresponding period of the previous year. This has created a gap of about nine per cent in bank resources.

Anubhuti Sahay, economist, and Nagaraj Kulkarni, senior rates strategist at Standard Chartered Bank, India, predict that the RBI would hike policy rates by 0.25 per cent during the current month and 0.50 per cent more during the rest of 2011. Rate hikes are expected to curtail economic growth, which is just picking up pace to nine per cent level, to an extent.

Banks also asked the RBI to write a letter to the Andhra Pradesh government to help microfinance institutions (MFIs) to recover the loan amounts in the state.

Courtesy: Mail Today