Banks will meet liquidity needs of MFs, says IBA

In an effort to soothe nerves of the country’s mutual funds (MFs) and the non-banking finance companies (NBFCs), the bankers today assured that they would come forward to support these financial institutions’ funding needs including liquidity to meet redemptions. With an access to additional Rs 40,000 crore of liquidity after the central bank’s slew of liquidity measures yesterday, the public sector banks today said that it is extremely comfortable for the banks to fund the MFs and NBFCs, and also to achieve a higher credit growth during the financial year.

“The Reserve Bank of India’s (RBI’s) recent measures will address the issues of the MFs and the NBFCs with a lot of ease. After assessing the whole situation and holding discussions with the Association of Mutual Funds in India (AMFI) on Friday, we are urging the MFs and the NBFCs to approach the banks and voice their problems. The fear of redemption pressure with the MFs will now be done away with,” said K Ramakrishnan, chief executive, IBA.

“Now we have Rs 60,000 crore of liquidity in the system, and the MFs and NBFCs could take advantage of this to meet their redemption needs,” said M V Nair, CMD, Union Bank of India.

About a month back, the mutual funds had raised concerns about meeting the redemption requirements, especially with the fixed maturity plans (FMPs) and the liquid funds, where the money is invested in the instruments like certificate of deposits (CDs) and commercial papers (CPs) issued by banks.

A tight liquidity condition with the banking system had intimidated the MFs that they won’t be able to meet redemptions in case the issuer banks default on their payments against these money market instruments. Responding to the situation, the central bank facilitated a special 14-day repo window of Rs 20,000 crore for the cash-deficient mutual funds. Later, the NBFCs too complained about the difficulties to meet their own credit demands as the banks were reluctant to lend.

Apart from cutting the cash reserve ratio (CRR) and the repo rate yesterday, the central bank announced further liquidity support by way of refinance facility to the extent of Rs 40,000 crore to banks. The RBI also increased the quantum of fixed rate repo facility from 0.5 per cent of net demand and time liabilities (NDTL) to 1.5 per cent of NDTL to enable the banks to meet funding requirements of NBFCs and MFs. With these measures, the MFs and NBFCs would get an access to Rs 60,000 crore for meeting their redemption demands.

The bankers will meet the finance ministry on Tuesday to conduct the quarterly review and discuss on the issues with the MFs and NBFCs, and the impact of the recent liquidity measures by the RBI.

Nair said that the RBI’s liquidity measures will help reducing the cost of funds for the banks, and a resultant cut in bank’s lending and deposit rates could be expected during the coming weeks. “We will decide next week in our board meeting on reducing the lending and the deposit rates. We are now confident to maintain a credit-deposit ratio of 74.5 per cent,” said Nair.

“The loan growth will be higher where the loan size is below Rs 30 lakh. Our credit growth have been 24 per cent in home loans so far. Our target is to achieve a growth of about 30 per cent in retail lending for the current year,” Nair added.

Commenting on the present credit situation, M D Mallya, CMD, Bank of Baroda, said: “None of the banks has been depriving the productive sector from credit. Fresh loans and the projects in the pipeline might have taken a hit, but disbursals for ongoing projects have been timely carried out.”

“We are expecting credit growth of 21-22 per cent for the year. We will maintain this growth for the next half of the year. Last year, we grew at 26 per cent, but the growth looked little slower this year due to base effect. We have our assets and liability committee (ALCO) meet next week, where we will decide on how much the lending and deposit rates could be reduced,” added Mallya.