RBI monitors use of overnight money to fund long-term credit

Banks’ net borrowing rises to a record Rs 1,48,490 crore.

Reserve Bank of India has stepped up checks on the use of funds borrowed from its liquidity window. The Central bank is keen to see that such funds are not diverted for lending purposes. Net borrowing by banks rose to a record Rs 1,48,490 crore on Tuesday.

Dealers said bank borrowing has been rising despite measures by RBI to ease liquidity. RBI as the monetary authority has increased monitoring. This includes examining if some banks are routing overnight money for lending in the busy season.

According to RBI data, gross borrowings at the repo window were Rs 1,50,615 crore. Some banks parked Rs 2,125 crore with RBI’s reverse repo facility in two sessions.

The treasury head of a public sector bank said, “RBI is in talks with us. They are looking for feedback on why liquidity continues to be tight. What they insist is that overnight borrowed funds should not be used to fund long-term credit needs.” The concern has arisen due to sluggish growth in deposits while the credit off-take has been in line with the RBI projection of 20 per cent for 2010-11. Deposits shrunk about Rs 65,000 crore in the fortnight ended November 05, 2010. Credit rose by 54, 658 crore in the same fortnight.

An IDBI Bank official said, “RBI’s exercise (checking out) is part of regular feedback about the state of the market. Many bank chiefs have complained about the drying up of resources. So, RBI wants to know if part of the money raised at LAF is being used for lending purposes”. The daily borrowings have remained above Rs 1,00,000 crore for over a fortnight. This naturally raises concerns for the regulator.

Yesterday, RBI Deputy Governor Shyamala Gopinath had said the central bank was monitoring the situation and there was so much potential liquidity in the system.

The rise in liquidity strains didn’t have much impact on overnight call rates. They hovered between 6.25 per cent and 7 per cent, indicating stability in the money market and the absence of panic. Call rates closed at 6.80 per cent, above RBI’s repo rate of 6.25 per cent, according to Clearing Corporation of India data.

One should not just look at the amount (of repo borrowing) but also call money, whether it has gone up substantially, the way it used to in June and July. That has not been the case. There has been no panic at all, Gopinath said.