Will the restrictions in the call mart curb the players or take them to a new level?
S A Bhat
GM (Investments),
Bank of India
The intention of the Reserve Bank of India (RBI) to restrict call borrowing/ lending was obvious for some time. The Narasimham Committee recommendations to prevent heavy reliance of banks on the call/ notice money market had been recognised by it while framing the asset-liability guidelines in February 1999.
Banks were advised to keep mismatches during the first two time buckets within 20 per cent and also to set cap on inter-bank borrowings, especially call loans.
Some banks, however, continued to depend heavily on call to carry out their operations. Being essentially unsecured, such dependence had serious implications on financial stability.
This was amply demonstrated by failure of a co-operative bank in the early part of last year resulting in an immediate ceiling on call market borrowings by urban co-operative banks. But the real impact of the current measures will be known only through experience.
An analysis of the past trend indicates that almost all nationalised banks and the State Bank of India have been traditional lenders with the foreign/ private banks being borrowers. As the limits placed on lending are more stringent than the ones placed on borrowings there may not be perceptible change for the borrowers.
The effect is going to be felt more when the second phase of reforms get activated in the month of December.
At that time lenders will find it difficult to lend despite being cash surplus due to the limit of 25 percent and the volatility will increase manifold.
The borrowers also will face problems due to the restriction of borrowing only to the extent of 100 percent of the owned funds or 2 percent of the aggregate deposits.
This will put much-reduced cap on the mismatch causing strain. Foreign banks and some private banks are positioning themselves to avoid such aberrations that can cause decline in profits. Some foreign banks that have strong balance sheets overseas are lining up term lines on reciprocal basis.
The Indian banks that are in fray for such lines are those that are having overseas operations. The media of reciprocal lines can be a win-win situation for both.
In summary, the restrictions may lead to a couple of things. First, there will be an initial volatility when liquidity tapers. But there will be no immediate impact on the call money market due to overhang of liquidity.
Thirdly, the move could lead to the development of an orderly term money market. Fourthly, it will also lead to the development of a repo market both of short and long durations. Fifthly, it will create reciprocal lines between foreign banks and Indian banks.
And lastly, it will lead to a vibrant swap market in foreign currencies for deployment/ sourcing of rupees.
Fund management facility in focus
P Mukherjee
Senior Vice-President (Treasury), UTI Bank
The first phase of Reserve Bank of India
