Interest rates set to rise

Banks forced to exhaust refinance facilities.

In a sure sign of an impending hike in interest rates, banks have been forced to tap refinance facilities on a large scale for the first time in several years. Because of the acute liquidity tightness, banks have started finding it difficult to meet the rising credit demand.

In fact, banks are close to exhausting their refinance facilities with the Reserve Bank of India (RBI), National Bank for Agriculture and Rural Development (Nabard), Small Industries Development Bank of India (Sidbi) and National Housing Bank (NHB).

"There has been a tremendous growth in credit, but the deposit mobilisation has not been able to keep pace with the credit offtake. We are finding it tough to meet the credit demand," said the chairman of a very large public sector bank. In the first three quarters of 2005-06, up to December 23, the credit offtake was to the tune of Rs 2,35,670 crore.

The credit-deposit ratio of the banking system is now close to 69 per cent. "If the trend continues, lending rates are bound go up," said another senior banker. Banks have now started raising their deposit as well as lending rates without changing their prime lending rates.

The RBI offers refinance for export credit, the NHB for housing loans while the Nabard and Sidbi refinance windows are for loans to agriculture and small-scale industries.

Banks hardly ever used the refinance facilities over the last few years because they were awash with liquidity.

Nabard has provided refinance of Rs 4,040.81 crore to banks till January 9, 2006, against a target of Rs 1,699 crore for the whole of 2005-06.

A Nabard official said, "This year banks have been availing of the refinance facility as there is a strong credit offtake. This is because they have been asked to double farm credit in three years beginning 2004-05."

A senior Sidbi official said there had been a "substantial" increase in the demand for refinance from banks, especially from the beginning of the third quarter of 2005-06.

Sidbi's actual refinance disbursals were close to Rs 2,000 crore till December 2005. The official said, the State Bank of India (SBI) has sought refinance support of Rs 2,500 crore from Sidbi at an interest rate close to 7 per cent. The country's largest bank saw an outflow of Rs 33,000 crore from its resource kitty last month due to redemption of India Millennium Deposits.

The refinance windows at the Reserve Bank of India against export credit and at the NHB for housing loans, too, are witnessing huge withdrawals by banks.

Banks get up to 100 per cent of loans disbursed under priority sector lending to SMEs as refinance and also housing loans. They get refinance of 15 per cent of the export credit eligible for this facility. The export credit refinance limit of the banking industry is currently around Rs 5,000 crore.

Nabard provides refinance for 5-15 years and charges interest rate between 6 to 7 per cent. Sidbi provides refinance for 3-5 years at around 7 per cent. NHB lends for 2-15 years at interest rates ranging from 6.50-7.25 per cent. The export credit refinance is available from RBI for a period not exceeding 180 days at the repo rate (currently 6.25 per cent).