Amid liquidity squeeze and a higher than expected credit offtake, bankers today requested the Reserve Bank of India to slash the CRR and SLR in its upcoming Third Quarter Review of Monetary Policy 2010-11 on January 25, besides keeping the key policy rates unchanged.
This call comes even as both RBI as well as the government are fighting high inflation, driven by a massive jump in vegetable prices since mid-December with unseasonal rain affecting crops.
After the customary pre-policy meet with the central bank, Indian banks Association Chief Executive R Ramakrishnan told reporters that the bankers led by State Bank, ICICI Bank, HDFC Bank, Bank of Baroda and Union Bank of India among others, demanded reduction in both the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR).
They said it will help in tiding over the tight liquidity situation and poor deposit growth, as the credit offtake is growing above the Industry’s and RBI’s own estimates.
None of the bankers chose to speak to the media, after the meeting.
“We requested RBI to slash both the CRR as well as the SLR (amount of prudential reserves that banks keep in the form of government securities, bonds, etc), even though we admit that inflation is a big concern. We see inflation at 7 per cent by the fiscal-end. However, this is 50 basis points (bps) above RBI’s estimates for this fiscal,” Mr. Ramakrishnan said.
At present CRR - the mandatory cash balance that banks park with the RBI - stands at 6 per cent, while SLR stands at 24 per cent.
Since October, RBI temporarily brought down the SLR by 100 bps to ease the liquidity situation and at its mid-quarter review on December 16, the apex bank brought it down to 24 per cent as a permanent measure to ease the liquidity pressure in the system.
From October onwards, banks have been borrowing over Rs. 1 lakh crore from RBI everyday on an average. The central bank’s key policy rates of repo and reverse repo stand at 6.25 and 5.25 per cent, respectively.
After falling for two months, food inflation started going up since mid-December and for the week ended December 25, it jumped to 18.32 per cent due to an abnormal rise in prices of food items like onions, milk and meat.
Though headline inflation for November stood at 8.48 per cent, given the very high food inflation and the recent Rs. 3 a litre petrol price hike, December numbers may be a tad higher than the previous month.
Mr. Ramakrishanan further said, the poor deposit growth is a matter of concern for banks. Despite an increase in deposit rates, the banks have been unable to attract money from the public for quite some time now, even as they have been witnessing an good spike in fund demand.
“We see the credit growth touching 22-23 per cent by the end of the fiscal,” Mr. Ramakrishnan said.
On the lingering crisis in the microfinance industry, he said they have requested RBI to write to Andhra Pradesh so that loan recovery process can resume.
Microfinance industry has been reeling under an existential crisis following the Andhra Pradesh Ordinance to regulate the wayward ways of their recovery agents in October.
The AP move necessitated by the spate of suicides by poor borrowers was alleged to have been precipitated by the strong-arm method of the MFI recovery agents. According to Andhra government officials, about 30 persons reported to have committed suicide in the state during September-October last year due to harassment by microfinance companies.
Following this Ordinance and the resultant crisis, RBI set up a panel headed by noted chartered accountant Y.H. Malegham to suggest ways to regulate this sunshine sector. The report is expected next month.
Another flip-side was the almost complete drying up credit flow to the sector as banks refused to lend any more money to MFIs, as many of these microlenders charge over 30 per cent from borrowers while banks lend to them at around 12 per cent. Banks have been demanding MFIs to cap their lending rate at 24 per cent.
Meanwhile, the largest MFI, the Hyderabad-based SKS Microfinance today reduced interest rates to 24.55 per cent per annum from all categories of small borrowers.