Indian banks ask RBI to ease CRR, SLR curbs as liquidity tightens

30 Sep 2008

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Mumbai: Indian banks have sought a relaxation in the cash reserve ratio (CRR) and statutory liquidity ratio (SLR) from the current levels of 9 per cent and 25 per cent respectively amidst an unprecedented liquidity crunch in the system.

Bankers have also asked the central bank to allow lenders to use the Liquidity Adjustment Facility window more effectively.

At a meeting called by the RBI to review the liquidity position of banks and to assess credit extension by banks ahead of an RBI policy review due next month, representatives of major banks – both in the public and private sectors –  have expressed ''strong concerns'' over the liquidity shortfall amidst unprecedented demand for credit.

There has been a spurt in demand for credit, mainly from sectors like fertilizers, oil and infrastructure companies, they pointed out.

The RBI has taken a series of measures over the past one year, including hikes in key lending rates and increasing the cash reserve ratio for banks, in a bid to arrest soaring inflation in the country. The RBI's liquidity squeeze coupled with the global financial meltdown originating in the US  has affected the liquidity positions of many Indian banks.

RBI hiked its CRR and short-term repo rate to 9 per cent each at its quarterly review of monetary policy in July this year to combat inflation, now hovering at a 13-year high level.

State Bank of India chairman O P Bhatt, Union Bank of India chairman and managing director M V Nair, Bank of Baroda CMD M D Mallya, Canara Bank CMD A C Mahajan, Bank of India CMD T S Narayanasami were among those present at the meeting. Citi and Axis Bank represented foreign lenders at the meeting.
 
Banks in India, meanwhile, are expected to incur a loss of over Rs400 crore due to Lehman, AIG exposure, despite assurances made by finance minister P. Chidambaram earlier this month and the Reserve Bank governor that the Indian banks are well insulated from the US financial crisis that has shaken global markets.

The banking sector has also taken a Rs410 crore hit in terms of mark-to-market (MTM) losses due to their exposure to troubled US financial institutions.

ICICI bank alone has lost over Rs309 crore on investments in derivative instruments of US investment bank Lehman Brothers and insurer AIG, said a senior finance ministry official.

The US financial crisis will also affect some state-run banks like State Bank of India, Bank of India and the Bank of Baroda that have operations in the US and had significant exposure to instruments of the troubled financial institutions. This, he said, could add another Rs234 crore.

ICICI Bank joint managing director Chanda Kochhar had earlier said the bank's exposure to foreign markets equal to about 4 per cent of its total balance sheet, and that was well within limits. The investment made by ICICI Bank's London subsidiary in Lehman Brothers constituted less than 1 per cent of its total assets and less than 0.1 per cent of the consolidated total assets of the ICICI group. ICICI Bank has consolidated assets worth $103 billion.

The finance minister also sought to ally fears over the fate of the Tata-AIG insurance ventures, following news that troubled AIG has appealed to the US Federal Reserve for a lifeline to help prevent it from going Lehman's way.

Most Indian banks, however, feel that if conditions worsen their international branches will get affected. They fear that foreign lenders may not turn over credit granted to their overseas offices as inter-bank exposure is going slow. Also, deposits in these international branches have reduced over the last fortnight.

Indian banks follow a reciprocal line of credit whereby they lend to the foreign bank's branch here while the foreign bank extends similar support to the Indian bank's overseas arm.

Indian banks have extended loans on expectations that the lines of credit by foreign banks would be rolled over on maturity. However, if those lines, which are due in the very near future, do not get rolled over, banks' overseas office may face asset-liability mismatch. This will lead to Indian banks swapping rupees into dollars in the domestic market to support their overseas operations.

Indian banks which have extended lines of credit to subsidiaries of US financial majors like Merrill Lynch and Lehman Brothers, meanwhile, have stopped lending to them, resulting in cancellation of deals worth about Rs2,000 crore.

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