Banks plead with RBI for mercy

Bankers today pleaded with the Reserve Bank of India (RBI) against raising the cash reserve ratio (CRR) further to suck out excess liquidity in the banking system.

Banks do not want monetary actions that have direct implications on interest rates, as they are grappling with high deposit and lending rates amid flush liquidity and stagnant credit growth. Bankers, led by O P Bhatt, chairman of State Bank of India (SBI), today met the RBI governor Y V Reddy as part of the central bank’s consultation process ahead of the monetary policy review. The RBI will undertake second quarterly review of the monetary policy on October 30.

RBI has raised CRR, the proportion of deposits banks need to keep with the central bank, by 200 basis points since December 2006 to 7 per cent, as its interventions in the foreign exchange market resulted in infusion of rupee liquidity, which has the potential of fanning inflationary expectations. RBI has bought $30.24 billion of foreign exchange during December 2006-August 2007.

The other bankers who accompanied SBI’s Bhatt were K V Kamath, managing director and CEO of ICICI Bank, A K Khandelwal, CMD, Bank of Baroda, T Narayanasamy, CMD, Bank of India and Sanjay Nayar, CEO, Citibank India.

There are expectations that the RBI would either raise the ceiling on bonds the government can issue under the market stabilisation scheme (MSS) or raise CRR for absorbing liquidity. Liquidity is very high in the banking sector with the RBI absorbing Rs 57,480 crore through reverse repo auctions today, about twice the amount it sucked daily in the last week of September 2007.

Bankers also urged the RBi to resume payment of interest on CRR balances. Looking at the blunt character of CRR, bankers said CRR should not be increased as it adds to the cost of banks.

After conclusion of the meeting, SBI’s Bhatt told reporters that the international situation (tight liquidity in the aftermath of the US subprime crisis and slowing US economic growth) came up for discussion. The domestic credit growth, which remains subdued over the same period last year, was also in focus.

Bhatt said there is pressure to reduce the lending rates even as deposit rates remained at elevated levels, putting pressure on margins. Asked if the RBI hikes CRR, Bhatt said effort would be to absorb whatever is possible and the balance may be passed on to customers.

One of the bankers also suggested that the RBI could consider providing likely monthly liquidity trends. RBI was also urged to allow banks to issue bonds of up to three years, like financial institutions, for funding long-term projects including in infrastructure.

Bankers have sought longer period for provisioning with respect to IFCI bonds. At present RBI has given allowed banks to make provisions over four quarters for IFCI bonds. Public sector banks are expected to take hit of Rs 900 crore for these bonds.

They has have also asked RBI’s help to keep entire banking sector out of Central Vigilance Commission.