Banks May Be Allowed To Raise Long-Term Funds

Bankers expect changes structural changes in the fund raising of banks and also the extensive use of refinance as a tool to pump prime the economy in the forthcoming credit policy.

The Reserve Bank of India is considering allowing banks to garner long-term resources without attracting the cash reserve ratio and statutory liquidity ratio requirements

Currently, only long-term funds that qualify as Tier II capital are exempt from SLR and CRR norms.

The move is expected to put banks on par with financial institutions in terms of long term resource raising as also encourage them to venture into infrastructure financing.

However, sources feel that in case the Reserve Bank of India takes such a step, it will also compensate the financial institutions, which could then be allowed to raise more retail fixed deposits.

Banks and financial institutions have been seeking the refinance facility since infrastructure projects involve high risk and have long gestation periods.

In case of the banking sector, since the deposits mobilised do not have a long maturity, banks have an asset-liability mismatch problem as they are unable to funds long-term projects.

It is also expected that in the credit policy, which is being announced on April 29, the Reserve Bank of India would restore the export refinance limit which was slashed from 100 to 50 per cent of the export credit outstanding.

Similarly, the general refinance limit is expected to be restored back to 1 per cent from 0.25 per cent.

The reduction is export and general refinance limits was stipulated in the middle of January as part of the measures to hike domestic interest rate and suck liquidity from the banking system.

The refinance limits stood reduced from Rs 6,856.15 crore in December-end to Rs 2,736 crore by January-end.

The general refinance facility stood reduced from Rs 4,459.93 crore to Rs 1,115.02 crore while the export credit refinance limits stood reduced from Rs 2,396 crore in December to Rs 1,621.64 crore by January.

As per Reserve Bank of India statistics, of the total limit of Rs 2,736.66 crore, the unutilised limits of the banks was Rs 533.83 crore.

Given that call money rates are ruling well below the refinance rate i.e. the Bank Rate, the unutilised portion is expected to have increased.