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Mumbai, March 26: Ravaged by a liquidity shortfall of more than Rs 1 lakh crore, banks will meet the Reserve Bank of India (RBI) on Tuesday to improve the cash situation.
The banks are ready with their bag of wishlists, including a proposal to cut the cash reserve ratio (CRR). A reduction in CRR by 50 basis points will release over Rs 10,000 crore into the banking system. Bankers are betting on RBI governor Y.V. Reddy paring the CRR by 1 percentage point.
CRR cut is just one among the many entreaties to RBI. Bankers feel rising interest rates offer good scope to mop up cash by raising the rates on deposits. They are in favour of removing the limits on NRI and FCNR (B) deposits. Another request is to leverage the excess government securities with banks to the system’s advantage.
Tuesday’s meeting is expected to have a bearing on lending rates. Banks have decided to bide time till the meeting to announce any hike in prime lending rates (PLR).
Interest rates on advances are northbound as money has become dearer due to insufficient liquidity.
The liquidity in the banking system started to run dry from the middle of December following redemptions under the $7.1-billion India Millennium Deposits scheme.
The situation deteriorated as deposits failed to keep pace with sustained growth in demand for credit.
Moreover, part of the deposits was parked with the RBI as CRR; in addition 25 per cent of the deposits had to be invested in government securities under the statutory liquidity ratio (SLR) requirement.
The tight cash situation was reflected in the weekly supplement released by the RBI on Friday. While aggregate deposits in the banking system stood at Rs 2,90.048 crore, the non-food credit offtake was Rs 3,46,321 crore.
“These figures reveal a gap of Rs 50,000 crore. But the actual gap is much larger as banks have to maintain a CRR and an SLR. The shortfall is close to Rs 1.40 lakh crore,” said K. Cherian Varghese, chairman, Union Bank of India.
Dena Bank chairman M.V. Nair said: “With the economy growing at a robust rate, a credit growth of 25 per cent can be assumed. Though deposits are rising by 17 per cent, there is a shortfall of over Rs 1 lakh crore as banks have to meet the statutory requirements.”
Banks have some other suggestions. The Indian Banks Association feels banks are in a position to leverage their excess SLR holdings, sources said.
“The excess holding of SLR by the banking industry is put at 6 per cent. Even 1 per cent reduction of this will release Rs 20,000 crore into the system,” sources added.
However, there may be no buyers for securities of such a magnitude. Banks expect the RBI to buy these securities.
Liquidity can also be improved by making deposits more attractive to non-resident Indians.
“The RBI has placed a ceiling (on interest rate) of Libor plus 75 basis points on NRE deposits and Libor minus 25 basis points for FCNR(B) deposits. These ceiling should be reviewed,” a banker remarked.