Refinance assistance grows in the first half.
With liquidity under pressure in the first half ended September 2010, some banks facing a severe resource strain have increased their reliance on the refinance facility provided by financial institutions including National Housing Bank (NHB) and Small Industries Development Bank of India (SIDBI).
Banks received total gross accommodation of Rs 15,300 crore in the first half of 2010-11, according to Reserve Bank of India data. Banks had repaid Rs 3,332 crore to these financial institutions during April-September 2009. Besides, SIDBI and NHB, NABARD and EXIM also operate the refinance window.
| ASSISTANCE BY FINANCIAL INSTITUTIONS TO BANKS | ||
| 2009-10 | 2010-11 | |
| April-Sept | Rs (-) 3,332 cr | Rs 15,300 cr |
| April-March | Rs 31,408 cr | Rs 33,871 cr |
| (-) means banks repaid money Source RBI | ||
The liquidity situation during the first half was tight as the Reserve Bank of India kept excess cash under control as part of its measures to contain the accelerating inflation. Also, the banking system witnessed tardy deposit growth in the April- September period. As a consequence, banks raised the frequency of using refinance windows and the liquidity adjustment facility for managing mismatches.
According to National Housing Bank data, banks availed themselves of refinance to the tune of Rs 2,045 crore in April-June 2010. Last year in the same period, the demand was much less. A few associates of the State Bank of India and the Central Bank of India were amongst those who availed themselves of the refinance facility in the quarter, an NHB official said.
The amount of financial support that commercial banks can draw is linked to the business (loans) done in a specific area like housing and lending to small and medium enterprises (or the SME sector) in the previous year.
One SIDBI official said it is cost effective for banks to avail refinance than raise funds through bulk deposits when the rates in the system are rising. The pressure on liquidity is expected to remain through the second half due to a better credit pick-up.
These funds come without any condition to maintain the Cash Reserve Ratio and the Statutory Liquidity Ratio, a senior State Bank of India official said. Refinance rates were attractive at between 6 per cent and 6.5 per cent when the rates in the system were hardening. Very few banks resorted to refinance assistance in the first half, he said.
The banking system began to face pressures (on liquidity) from the third week of May. RBI opened the extra liquidity window on May 26 to ease the pressure. A similar facility was thrown open in the last week of October when the call rates touched a two-year high of 12 per cent. Banks could avail additional liquidity support up to one per cent of the net demand and time liabilities. It waived the need to pay fines for keeping a low statutory liquidity ratio.
