RBI to nix prudential limits for banks

RBI REPORT ON CURRENCY & FINANCE 2005-06

The Reserve Bank of India (RBI) is planning to do away with the prudential limits on bank borrowings in the call market.

This will help the banking regulator to assess the market effectively and conduct liquidity management operations aimed at correcting the market mis-matches. It would also enable closer monitoring of the movements in call money rates (short-term lending rates).

The inter-bank call rates have been trading volatile, with the overnight rates crashing below the one per cent mark on Thursday. The rates hit an intra-day low of 00.50 per cent and ended the day in a band of 00.50 per cent to 00.75 per cent.

The inflow of Rs 20,000 crore into the banking system after a bond maturity pushed the call rates down. The dollar sterilisation in the forex market is also adding to the liquidity.

Direct regulations in the form of prudential limits on borrowings and lendings would need to eventually graduate to a system where such limits are taken care of by the bank's own internal systems of asset liability management framework, said the RBI in its report on currency and finance.

The central bank had stated in March that a bank's inter-bank liability (IBL) should not exceed 200 per cent of its net worth as on March 31 last year. However, it had given freedom to the individual banks to fix a lower limit for their inter-bank liabilities, keeping in view their business models and with approval of the board of directors.

The banks whose capital adequacy ratio was at least 11.25 per cent, or 25 per cent more than the minimum capital-to-risk-weighted assets ratio (CRAR) of nine per cent as on March 31 of the previous year, are allowed to have a higher limit of up to 300 per cent of the net worth for IBL. The existing limit on the call money borrowings prescribed by RBI would operate as a sub-limit within the above limits.