Banks to pitch for liquidity in pre-policy meet

Bankers will next week make a strong pitch to the Reserve Bank of India (RBI) to maintain sufficient liquidity to meet the demand for funds from the corporate sector.

The demand, expected to be raised when RBI Deputy Governor Subir Gokarn holds his first pre-credit policy meet, comes despite bankers factoring in monetary tightening in the third quarter review of the monetary policy on January 29.

While Gokarn’s team is scheduled to meet bank chiefs on January 14, a similar meeting with primary dealers is scheduled on January 11.

Primary dealers said the volatility in the bond market when yields were hardening created pressure on their books. Given the limited financial wherewithal, bond houses would like to see the current volatility come down.

In addition, banks are going to seek permission to issue infrastructure bonds that are exempted from capital gains tax.

Further, bankers will ask RBI for exemption from maintaining the prescribed cash reserve ratio (CRR) and the statutory liquidity ratio (SLR) on such bonds. CRR is the proportion of deposits set aside while SLR is part of the deposits that have to be invested in specified bonds. Such an exemption would be required if funds raised through the bond programme were reckoned as deposits. Banks have requested the government to allow them to issue senior bonds with a maturity of less than five years. At present, only infrastructure finance companies are allowed to issue bonds with tax benefits.

For bankers, meeting the demand for credit tops the agenda. Bank chiefs said the demand for credit was expected to pick up in the second half of 2010. “With all this talk on tightening, which seems logical now, we need to be assured that when credit growth and economic activity pick up, we should not be short of resources,” said a banker. On Monday, RBI Deputy Governor Shyamala Gopinath had said that inflation and growth would decide the central bank’s course. Both Gokarn and Gopinath had expressed concern that food inflation might spill over to other sectors.

Another issue likely to be debated was the slow pick-up in credit growth, bankers said. Banks disbursed Rs 1,65,744 crore between April 2009 and the middle of December, much less than the Rs 2,81,820 crore in same period of 2008. A senior IDBI Bank official said while the business environment had improved for companies, the pace of the credit offtake was slow.

There is a usually a one-three month lag between sustained industrial and services growth and an upturn in credit offtake. The first to pick up is demand for working capital and short-term funds.

Banks have also made huge investments in short-term schemes of mutual funds (MFs). These resources have been deployed in corporate paper. Direct and indirect assistance through MFs has been substantial, they say. RBI, in its second quarter review, had raised concern over large investments by banks in MF schemes. This could again come up for discussion in the pre-policy review meeting.

PM’s luncheon

Prime Minister Manmohan Singh will host a lunch for former Reserve Bank of India governors on January 15. Singh, a former governor himself, is hosting the lunch as part of RBI’s Platinum Jubilee. On the same day, RBI is holding its board meeting in New Delhi. RBI Governor D Subbarao is hosting a dinner that day.