The Hindu Business Line : Banks opting for refinance facility

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Mumbai Feb. 6 To get over tight liquidity, banks are increasingly opting for cheaper refinance from Nabard and SIDBI to fund the farm sector and small-scale enterprises.

Refinance portfolio of SIDBI has shown an increase of about 7-8 per cent as on January 31 over the previous year as banks feel refinance rates are attractive.

There has been a good demand from major public sector banks, said a senior official from SIDBI.

"The marginal cost of borrowings of banks has gone up substantially and there is a pressure on liquidity. The rates for short-term refinance are over 9 per cent and for long- term, around 8.5-10 per cent," he added.

As Dr A.K. Khandelwal, Chairman and Managing Director of Bank of Baroda, said, "Refinance from financial institutions such as Exim Bank, Nabard, NHB and SIDBI does not go into calculating a bank's demand and time liability or net demand and time liability, for maintaining CRR and SLR. Eligibility for refinance can be treated as access to committed lines of credit at pre-determined rates of interest. Refinance is a good option in the current interest rate scenario."

In the current scenario, liquidity is not comfortable while credit growth continues to be robust.

"Refinance is an alternative route for banks to raise resources. With the RBI raising repo to 7.5 per cent, call rates ruling in the range of 7-9 per cent and deposit rates touching 9-10 per cent, the refinancing route seems attractive," said a senior official from a public sector bank "It is readily available too," he added.

Refinance is not only cheaper than raising resources from the market, but banks can also mange their asset-liability profiles.

A senior official from Nabard said it offers refinance in the short, medium and long term at 2.5-8 per cent. No bank will be able to raise resources at these rates today. "It is a long-term development finance tool and there is going to be a robust demand from banks," he added. A year ago, banks had pulled away from refinance with open market rates dipping.

"Refinancing in today's environment is a cost effective means of financing for banks and helps them to square assets and liabilities as funding tenure is closely linked to the maturity profile of the asset," said Mr Krishnan Sitaraman, Head-Financial sector ratings, Crisil.

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