Battling a money crunch, banks on 11th Jan asked the Reserve Bank of India (RBI) to lower the level of cash and government bonds they are required to maintain as reserves. Pruning the reserve ratios, which are a bank's percentages of its net liabilities, will free resources that can be lent to support growth.
CEOs of large commercial banks asked RBI to cut the cash reserve ratio (CRR) - a slice of customer deposits that banks have to set aside as cash, as well as the statutory liquidity ratio - the proportion of government securities that banks have to hold on their books. Currently, the CRR is 6% and SLR 24%.
At the pre-credit policy meeting with RBI deputy governor Subir Gokarn, bank CEOs suggested a 0.5% to 1% cut in CRR and SLR. The credit policy is scheduled on January 25. Speaking to the media, K Ramakrishnan, chief executive of the bankers' lobby of the Indian Banks Association, said, the relaxation has been sought since loan growth has gained momentum.
Most bankers told RBI they hope to meet a credit growth target of 20% this year. A cut in either CRR or SLR, or both, will release liquidity in the banking system, which is facing a shortage of around 80,000 crore - a gap that banks have to meet by borrowing from RBI on a daily basis.
But financial markets fear that RBI may increase rates with food inflation surging. Most research firms have revised their inflation targets upwards and expect RBI to raise rates by 25-50 basis points in the forthcoming policy.
Analysts are worried that an increase in interest rates could impact banks' margins. For most banks, the net interest margin vary from 2.50% to 4%. Some banks even suggested that RBI should pay interest, even if it is a nominal one, on the CRR balance.
At the meeting, banks also urged RBI to allow them restructure loans given to microfinance firms while retaining standard asset status on such loans. According to RBI regulation, any restructured loan to a non-manufacturing entity should be treated as substandard asset on the very day the loan is restructured.
Bankers also said the regulator should allow them to amortise the pension liabilities over the next five years. As things stand, most banks have not fully provided for pension liabilities which add up to 6,000 crore.
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