The Hindu Business Line : More banks tapping Nabard refinance window

Bangalore, Feb. 27 With liquidity squeeze continuing unabated, banks have now begun accessing the refinance window of National Bank for Agriculture and Rural Development.

So far only the smaller public sector banks like Vijaya Bank have tapped this window. Vijaya Bank’s Chairman and Managing director, Mr Prakash Mallya, said, “We have sought refinance support for Rs 700 crore from Nabard.”

But larger banks have also now begun tapping this window. Bankers said that the refinance window allowed them to draw funds at 9 per cent. Nabard refinance for commercial banks is currently available at anywhere between 90 and 100 per cent for commercial banks.

Access to Nabard refinance was driven by the tight conditions prevailing in the markets. Several public sector banks have been forced to raise bulk deposits at close to 10 per cent.

Moreover, recourse to the repurchase window of the RBI at Wednesday’s liquidity adjustment facility auction was Rs 14,675 crore.

bulk deposits

Besides, bankers said, they expected the situation to deteriorate next month as banks brush up their asset books. In addition, some bulk deposits were coming up for renewal. Most bulk deposits with the banks were placed through subscription to Certificates of Deposit. CDs under current regulations are allowed a maximum maturity of only one year.

Moreover, advance tax payments would also exert liquidity pressure, bankers said. Some banks have already made provisions for tax payments. But during the last two quarters, some banks including large private sector banks had underprovided for tax liabilities, for beefing up their bottom lines. These banks were expected to tap the CD markets, the bankers said.

CD rates were expected to rise further in the coming months, as several public sector enterprises have opted to continue the bid route this year as well. This was despite the Ministry of Finance’s advice to the contrary, bankers said.

Attractive route

Bankers said that what made the refinance window attractive were the comparatively low costs. The effective costs of refinance were far lower than the CDs. CDs are currently liable for reserve ratios — Cash Reserve Ratio and the Statutory Liquidity ratio. CRR is 7.5 per cent currently, these balances are interest free.

Accordingly the effective cost of raising funds through CDs was at least 50 basis points more, the bankers said. Refinance from Nabard does not entail maintaining reserve ratios, containing the funding costs by at least 1.5 per cent, they added.

Besides, some PSBs had capped their bulk deposits at 9.25 per cent.

These banks would prefer to redeem the bulk deposits, if the rates are higher than the cap as this would help contain the cost of working funds.

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