RBI, bankers to mull fund-raising on Friday

Reserve Bank of India Governor D Subbarao is scheduled to meet a group of select bank chiefs on Friday to assess the resource mobilisation situation and also seek their inputs for the next month's second quarter review of the monetary policy.

The meeting comes at a time when credit growth has dropped to 14.21 per cent for the year up to August 28, as against 25 per cent a year ago. While the central bank has been prodding banks to lower lending rates, bankers said that the fall in the pace of credit flow was not on account of high interest rates but was due to demand slump from the corporate sector which has put expansion plans on hold. "The only sector where we see some demand is infrastructure, and particularly the power sector. Otherwise, there is little to talk about," said the chairman of a large public sector bank.

Another bank chief added that there was some demand pick up in the home loan segment as property prices had dropped from last year's level, while the demand for auto loans was also there. Fearing defaults, banks have been reluctant to offer unsecured loans.

With low credit offtake, banks have been parking funds in government securities and in mutual funds. One of the issues likely to be discussed at the meeting is the proposal from some banks to increase the ceiling on government securities in the held-to-maturity (HTM) category, which helps them avoid mark-to-market (MTM) provisioning at a time when yields have risen. At present, the ceiling is 25 per cent of the net demand and time liabilities, but many public sector players are close to exhausting the limit and have been reluctant to participate in bond auctions. The increase in HTM bonds may come at a time when the government is budgeted to borrow a record Rs 4,51,000 crore during the current financial year. The governor's meeting comes ahead of the central bank's meeting with the finance ministry on September 29 to decide the borrowing calendar for the second half of the financial year.

While lending growth has been low, on the deposit side, while the year-on-year growth dropped to 20.52 per cent from a peak of 22 per cent in July despite deposit rates dropping, banks continue to attract funds due to risk aversion in the retail segment of the market.

According to RBI, banks were still offering up to 8 per cent on deposits, while the benchmark prime lending rate was hovering between 11.75 per cent and 15.75 per cent.

The repeated reduction in benchmark rates have helped generate abundant liquidity in the system, and for nearly six months, banks have been parking over Rs 1,00,000 crore on a daily basis through the RBI's reverse repo window that is used to suck out excess liquidity from the system.

During the first four months of the current financial year, the overnight call rate has been at 3.22 per cent, the lowest since 1970-71, RBI data showed.