RBI boosts liquidity; relief for real estate, export, small sectors

The Reserve Bank of India today announced a slew of measures, including a 100 basis point reduction in the repo and reverse repo rates and easier terms of lending to the recession-hit micro and small industries, exporters and the real estate business, in view of the tight money conditions.

Announcing the policy measures today, RBI governor D Subbarao said there will be no change in the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR) for banks.

The RBI said the repo rate under the liquidity adjustment facility (LAF) will stand reduced by 100 basis points, from 7.5 per cent to 6.5 per cent, and the reverse repo rate by 100 basis points, from 6.0 per cent to 5.0 per cent, effective 8 December.

In a bid to enhance credit flow to the labour-intensive micro and small enterprises (MSE) sector, the RBI also decided to provide refinance facility of up to Rs7,000 crore to the Small Industries Development Bank of India (SIDBI). This refinance will be available against SIDBI's incremental direct lending to MSEs, banks, NBFCs and state financial corporations (SFCs) against the latter's incremental loans and advances to MSEs, effective 30 September, RBI said in a release.

The facility can be availed of and repaid under the LAF any time for a period of 90 days from 8 December. It is also renewable at the end of the 90-day period. This facility will be available up 31 March 2010.

The RBI is also working on a similar refinance facility for the National Housing Bank (NHB) of an amount of Rs4,000 crore, details of which will be announced at the next meeting of the central board of the Reserve Bank meeting next week.

RBI had, on 15 November, announced that it will permit authorised dealers Category - I banks to consider applications for premature buyback of foreign currency convertible bonds (FCCBs) from their customers, where the source of funds is foreign currency holdings in India or funds raised through fresh FCCBs, but at a discount of 15 per cent to their book value.

RBI has now extended it to applications for buyback of FCCBs out of rupee resources also, but on an increased discount of 25 per cent. The amount of the buyback, however, is limited to $50 million of the redemption value per company. Resources for the buyback should also come from internal accruals of the company as certified by the statutory auditor.

Extension of FCCBs was also permitted at the current all-in cost for the relevant maturity.

The central bank also decided to accord priority status to loans granted by banks to housing finance companies (HFCs) for on-lending to individuals for purchase/construction of dwelling units, provided these loans do not exceed Rs20 lakh per dwelling unit per family. However, the eligibility under this measure will be restricted to five per cent of the individual bank's total priority sector lending. This will apply to loans granted by banks to HFCs up to 31 March 2010.

In view of the difficulties faced by the real estate sector, it has been decided to extend exceptional/concessional treatment to the commercial real estate exposures which are restructured up to 30 June 2009, the RBI said.

To address temporary cash flow problems of viable units in the real estate sector, the RBI will, as a one-time measure, will also make a second restructuring done by banks of exposures (other than exposures to commercial real estate, capital market exposures and personal/ consumer loans) up to 30 June 2009, make them eligible for exceptional regulatory treatment.

To help the recession-hit export sector, it has been decided to reduce interest rate on post-shipment rupee export credit up to 180 days will be kept 2.5 percentage points below the base prime lending rates of banks. This may be extended to all overdue bills up to 180 days from the date of advance.

RBI said operational instructions covering these measures will be issued separately.

The central bank expects these and the earlier measures to help boost demand and arrest the growth moderation. The reduction in the repo/reverse repo rates should result in a reduction in the marginal cost of funds to banks and enable them to improve the flow of credit to productive sectors of the economy on viable terms.

The liquidity support provided to the SIDBI under the refinancing arrangement is expected to alleviate the credit stress/tightening of lending conditions confronting micro and small enterprises and should revive activity in these employment-intensive drivers of growth.

The facility for premature buyback of FCCBs will help Indian companies to take advantage of the current discounted rates at which their FCCBs are trading.

The special dispensation for treating loans to HFCs as priority sector lending will boost lending to the housing sector. The facilities for restructuring exposures will help soften pressures being faced by the commercial real estate and other sectors in the current environment, it said.

The benefit of the concessional rate of interest available to the exporters up to 180 days irrespective of the original maturity of the export bills is intended to benefit exporters who have drawn bills for shorter maturities and are facing difficulties in realising the bills on due dates on account of external problems.

The RBI said, it will continue to closely monitor the developments in the global and domestic financial markets and will take swift and effective action as appropriate.

''The Reserve Bank's policy endeavour will be to minimise the negative impact of the crisis and to ensure an orderly adjustment. In particular, we will try to maintain a comfortable liquidity position, see that the weighted average overnight money market rate is maintained within the repo-reverse repo corridor and ensure conditions conducive for flow of credit to productive sectors, particularly the stressed export and small and medium industry sectors,'' the RBI said.

While the fundamentals of the economy continue to be strong, RBI said a period of painful adjustment is inevitable till calm and confidence are restored in the global markets.