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Liquidity about to ease, says RBI

By BS Reporter in Mumbai
October 13, 2008 11:06 IST
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The tight liquidity conditions in the money markets will ease over the next 15 to 20 days, Reserve Bank of India Deputy Governor V Leeladhar said.

He told Business Standard that money will flow into the system as soon as Parliament approved the Rs 25,000 crore (Rs 250 billion) reimbursement to banks for the amount of sticky farm loans written off or settled as part of the debt waiver scheme. In addition, the government will pay cash to fertiliser companies for the subsidy burden. Further, arrears on account of the award of the Sixth Pay Commission are to be released by the government.

Leeladhar said these will be over and above the liquidity easing that will take place on Monday, following the reduction in the cash reserve ratio, or the proportion on deposits set aside by banks. RBI has reduced CRR 150 basis points to 7.5 per cent in an attempt to increase liquidity in the markets by a total of Rs 60,000 crore (Rs 600 billion). In addition, the government called off two auctions for bonds worth Rs 10,000 crore (Rs 100 billion), citing liquidity constraints.

Over the last three weeks, call rates have stayed in the double-digit zone and neared 20 per cent on Friday. With liquidity remaining tight, banks have virtually frozen lending. As a result, there is additional pressure on companies which want to borrow resources to meet their funding requirements.

The deputy governor, however, reiterated that Indian banks were well-capitalised and had a low level of non-performing assets. "Public sector banks have ploughed back money to improve their capital adequacy, and steps like the Sarfaesi Act have helped them reduce the level of non-performing assetsÂ… In the case of private banks, there has been a significant amount of consolidation through mergers, and no one has a capital adequacy ratio of less than 9 per cent. Today we can take prompt corrective action if the NPA levels go up, or capital adequacy falls below 9 per cent, or the return on assets falls below 1 per cent. Banks know this and they are on their toes to make sure their ratios are better than these," he said.

As for the rest of the financial sector, both urban cooperative banks and the 400 non-banking financial companies that take deposits from the public, have been made stronger by RBI action in recent years. The deposit-taking NBFCs between them have public deposits of only Rs 3,000 crore (Rs 30 billion), which is less than one-tenth of 1 per cent of the banking system.

In the case of non-banking financial companies that are associated with foreign banks, or are subsidiaries of Indian banks, they have been included in group exposure limits and general RBI scrutiny, and thus brought within strict regulation. In the case of systemically important non-banking finance companies too, Leeladhar said that the new reporting norms and the cap on exposure will help keep a check.

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BS Reporter in Mumbai
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