Money management – Sub Chid
RBI Governor Subba Rao and FM Chidambaram are taking all steps to coax that bear in the market to become a bull, but the bear seems to know that it is a lot of bull.
Yesterday morning Chidambaram met the Prime Minister along with Subba Rao and later issued a press release to the effect that:-
the banks were able to access only Rs.3,500 crore from the special window of Rs.20,000 crore opened by RBI for providing liquidity to mutual funds;
inter-bank lending still remains constrained and it is necessary to overcome these constraints;
it is important to ensure that credit flows to borrowers within the sanctioned limits of term loans and of working capital; and that it is also important to enhance the credit limits where borrowers require more credit;
Government and RBI are agreed on the measures that have to be taken immediately.
Governor, RBI is on his way to Mumbai and will work out the details of the measures agreed upon. I expect to be able to make a statement later in the afternoon.
As promised he made another statement in the evening and announced that it is proposed to take the following additional measures:
(i) Under the Agricultural Debt Waiver and Debt Relief Scheme, Government had agreed to provide to the commercial banks, RRBs and cooperative credit institutions, a sum of Rs.25,000 crore as the first instalment. It is felt that this money should be provided immediately. Hence, at the request of Government, RBI has agreed to provide a sum of Rs.25 ,000 crore to the lending institutions immediately. The money will be made available to the commercial banks (Rs.7 ,500 crore) and to NABARD (Rs.17,500 crore). There will be no requirement of providing collateral.
(ii) The limit of FII investment in corporate bonds will be raised from US$ 3 billion to US$ 6 billion.
(iii) Our banks are well capitalised. Their CRRs are well above the Basel norm of 8 per cent and the RBI stipulated norm of 9 per cent. No bank has a capital adequacy of less than 10 per cent. Nevertheless, Government has decided to provide the banks access to finance in order to raise the CRAR of banks that are now between 10 to 12 per cent to reach the level of 12 per cent by a suitable date in the future. The details of the capitalisation scheme are being worked out.
(iv) RBI has already issued an advisory to the banks to enable smooth flow of credit to borrowers of term loans as well as working capital. Government is also issuing an advisory to public sector banks impressing upon the banks the need to:
1. ensure easy drawdown against sanctioned limits;
2. appraise, promptly, requests for enhancement of credit limits; and
3. continue to participate actively in the inter-bank call money market.
And the Reserve Bank Governor has reached Mumbai as correctly predicted by the Finance Minister and has issued guidelines to banks to use that 20,000 Crores, which says,
“The Reserve Bank announced and conducted a special fixed rate term repo at 9 per cent per annum against eligible securities for a notified amount of Rs.20,000 crore on October 14, 2008, with a view to enabling banks to meet the liquidity requirements of mutual funds. Banks utilized Rs 3500 crore of this facility on October 14, 2008.
2. The special fixed rate term repo under liquidity adjustment facility will now be conducted every day until further notice up to a cumulative amount of Rs 20,000 crore for the same purpose. Accordingly, the residual amount will be notified every day till further notice.
3. The eligible banks and PDs may submit their applications electronically through NDS between 2.30 PM to 3.15 PM. today. Allocations would normally be made on a pro-rata basis in case the tenders exceed the notified amount.
4. The Reserve Bank will issue a press release each day mentioning the cumulative utilisation by banks and PDs under this facility, the notified amount and the tenor for the next day's auction.
5. This repo will be in addition to the repo/reverse repo auctions conducted under Liquidity Adjustment Facility (LAF) and Second Liquidity Adjustment Facility (SLAF) which will be held as usual.
6. The settlement for the special repo would be conducted separately and on gross basis.