The Hindu Business Line : RBI seeks to limit inter-bank lendings

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Mumbai March 6 The Reserve Bank of India has warned banks about the potential risks of having a high concentration of wholesale deposits.

The central bank in a notification issued on Tuesday has asked banks to put in place a comprehensive framework for Inter-Bank Liabilities (deposits) management.

"Banks having high concentration of wholesale deposits should be aware of potential risk associated with such deposits and may frame suitable policies to contain the liquidity risk arising out of excessive dependence on such deposits," said the notification.

Banks have been asked to limit their inter-bank liabilities (banks lending to each other) at 200 per cent of their net worth as on March 31 of the previous year. However, individual banks, with the approval of their boards of directors can fix a lower limit. Banks having a capital adequacy ratio of at least 25 per cent more than the minimum 9 per cent (capital adequacy of 11.25 per cent as on March 31, the previous year) have been allowed a higher limit of up to 300 per cent of their net worth for inter-bank borrowings.

Analysts point out that till now there were restrictions on bank lending in the call market. This principle has been extended to Certificates of Deposits and Fixed Deposits where banks place money with each other to expand their balance sheets.

The limit prescribed will include only fund-based IBL within India (including inter-bank liabilities in foreign currency to banks operating within India). Inter-bank liabilities outside India are excluded, said the RBI.

The above limits will not include collateralised borrowings under CBLO and refinance from NABARD and SIDBI.

The existing limit on the call money borrowings prescribed by RBI will operate as a sub-limit within the above limits, said the RBI.

The guidelines will be applicable from April 1, 2007. Banks, which are not in a position to comply with these requirements from April 1, 2007, may furnish a plan to RBI for approval indicating a fresh date for falling in line.

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