Express concern over slow deposit growth in pre-policy meeting with RBI.
In a pre-policy meeting with the Reserve Bank of India (RBI), banks today asked the central bank to reduce the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR) to improve liquidity.
The liquidity crunch became acute in the last two months of 2010, with banks borrowing more than Rs 1 lakh crore from RBI’s repo window on a daily basis. However, the situation has improved in January and daily liquidity deficit has come down significantly to under Rs 1 lakh crore. However, it is still above RBI’s comfort zone of Rs 50,000 crore.
“Liquidity is a concern. The bankers made a very clear representation that SLR and CRR must come down,” K Ramakrishnan, chief executive officer of the Indian Banks’ Association, said after the meeting.
RBI would announce the third-quarter review of the monetary policy on January 25. The prevailing liquidity crunch is mainly on account of lower government spending and higher growth in credit as compared to deposits.
During the mid-quarter policy review in December, RBI had cut SLR by one percentage point to 24 per cent of their net demand and time liabilities. It also said it would not penalise banks if their SLR dipped up to one per cent of deposits due to repo borrowings.
SLR is the portion of deposits banks need to invest in government bonds. At six per cent, CRR is unlikely to come down RBI is reluctant to use it as a short-term tool. In addition, with inflation concerns in place, this may send a wrong signal.
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Inflation, especially food inflation, has been spiraling up. For the week ended December 25, food inflation surged to 18.32 per cent, as against 14.44 per cent the week before. The wholesale price index (WPI)-based inflation was 7.48 per cent in November. The government will release inflation data for December on Friday.
“The risks to inflation remain. We expect WPI inflation to be in the range of 6.5-7 per cent by March 2011,” said Samiran Chakraborty, regional head of research, Standard Chartered.
For March 2011, RBI projects headline inflation at 5.5 per cent, with an upward bias. According to Chakraborty, over the next few quarters, a rise of 75 bps in policy rates can be expected.
In the last one year, RBI has increased repo and reverse repo rates by 150 and 200 bps, respectively, to curb inflation. Some analysts expect it to raise interest rates by 50 bps during the third quarter policy review.
Growing gap in credit-deposit growth
Ramakrishnan said bankers also expressed concerns over slow growth in deposits as well as current and savings accounts.
For the year ended December 17, deposit growth was 14.7 per cent while credit growth stood at 23.7 per cent. The central bank had projected 18 per cent and 20 per cent growth for deposits and credit, respectively. The growing gap between loans and deposits may result in an acute asset-liability mismatch for banks.
Banks have been aggressively raising deposit rates to boost mobilisation. Since October, retail deposit rates have gone up by about 250 bps. Some banks are offering as high as 9.5 per cent a year.
Apart from monetary aggregates such as credit and deposits, banks also discussed restructuring of loans extended to microfinance institutions (MFIs) and amortisation of public sector banks’ pension liabilities, bankers who attended the meeting said.
“Our main concern is repayment from MFIs. Until such concerns abate, fresh loan flow to the sector will be difficult. RBI said it was waiting for the Malegam Committee report,” said a banker who attended the meeting.
Following the controversy over high interest rates charged by MFIs and coercive recovery practices, RBI set up a committee under Y H Malegam to look into the issues of the industry. The committee is expected to submit its report within three months from the time the terms of reference were finalised, which was around the end of October.