Banks increase recourse to Sidbi and NHB refinance

Banks increased their recourse to seeking refinance from the National Housing Bank (NHB) and Small Industries Development Bank of India (Sidbi) to tide over the tight liquidity in the quarter ended June 30.

Banks availed refinance to the tune of Rs 2,045 crore in April-June, according to NHB data. Demand was much less in the same period last year.

The frequency of banks tapping the refinance window increased during April-June. A few associate banks of the State Bank of India and Central Bank of India were amongst those who availed refinance facility in the quarter, an official at NHB said.

The amount of financial support that commercial banks can draw is linked to the business done in specific areas like housing and lending to small and medium enterprises in the previous year.

Refinance is term facility (loan with tenure beyond one year). Besides resource conditions, the cost of refinance also has a bearing on decision.

A senior State Bank of India official said, “The rate charged for refinance is higher (around eight per cent) compared what RBI charges us for borrowing at the liquidity adjustment facility (LAF) window”. The present repo rate is 5.5 per cent.

RBI also provides banks refinance against the export credit. Similar to the NHB window, banks also approached Sidbi in the first quarter.

One senior public sector bank executive said liquidity pressure on the banking system started increasing from the third week of May. Sensing the strain on liquidity, RBI on May 26 announced steps to ease the pressures.

It opened a second daily LAF auction and permitted banks to avail an additional liquidity support up to 0.5 per cent of net demand and time liabilities. Banks did not seek much of refinance support in April-June 2009, as the system was flush with money.

“There was good demand for refinance from banks in three months” said senior Sidbi official. While many banks have chosen to avail the facility, some have preferred to use RBI’s LAF, as they viewed tight liquidity conditions to last only for a short while.