Banks seek rate cuts to help infra

Within hours of the Reserve Bank of India’s (RBI’s) mid-term review of the annual policy on Friday, top bankers sought further relaxation in the Cash Reserve Ratio (CRR) and the Statutory Liquidity Ratio (SLR) to help funds flow to the infrastructure sector. In addition, they demanded a further relaxation in the provisioning norms for core sector projects that are delayed by over two years.

The bankers also discussed liquidity constraints for foreign operations of Indian banks. Banks find themselves in a tight spot as many international banks, which have been affected by the global financial turmoil, are not rolling over credit lines due to resource crunch and are reluctant to lend.

“As a way to attract resources, especially from non-resident Indians (NRIs), bankers discussed options, including further increase in the ceiling on the interest rate linked to the London Inter-Bank Offer Rate (Libor),” said a banker.

In addition, there was also a mention of removing the ceiling on trade finance. On Friday, RBI raised the ceiling from 75-125 basis points (bps) to 200 bps above Libor for six months to over three-year term trade credit, but bankers are demanding a further relaxation to enable them to lend to importers and exporters. “When we are raising resources at market rates, it is difficult for us to extend credit at a lower rate,” said a bank executive.

On Friday evening, senior executives from State Bank of India, ICICI Bank, Bank of India and Union Bank of India, among others, met RBI officials. This was the second round of discussions with the central bank to deal with liquidity constraints.

Sources close to the development said funding for infrastructure projects, which have a long gestation period, was growing, while resources being raised for the same, predominantly through deposits, have a shorter maturity. This created asset-liability mismatch, they added.

In the days ahead, when industrial growth may slow down further, it is the infrastructure sector that will become the main area for credit with an ambitious target of $500 billion in the Eleventh Plan. So, the issue of mismatch was expected to be more critical, said a banker at the meeting.

According to RBI data up to October 10, 2008, there was a sizeable credit pick-up by the infrastructure sector. On a year-on-year basis, it grew by 35.8 per cent, compared with 32 per cent a year ago.

The bankers also pointed out that easier non-performing asset (NPA) provisioning norms for infrastructure projects, which have been delayed by over two years due to factors beyond the control of banks and the promoters, was essential. RBI has already relaxed norms for core sector projects delayed up to two years. Originally, the flexibility on NPA provisioning was available for delays up to one year.