The Hindu Business Line : RBI signals cheaper loans

Mumbai, Dec. 6 Sending a clear signal to banks to reduce lending rates and advance more credit to productive sectors, the Reserve Bank of India on Saturday cut its key short term rates – the repo and reverse repo – by one percentage point each.

The rate cuts, which the market had been speculating about the past few days, form part of a package of measures - dubbed as ‘growth stimulus’ - announced by the central bank to step up demand and boost growth in the economy.

Announcing the measures at a press conference on Saturday, the RBI Governor, Dr Duvvuri Subbarao, said:

“We hope that the measures announced today encourage banks to cut lending rates. The financing cost, transaction cost, and administrative cost of passing on this money should be as small as possible.”

The other measures in the package include permission for banks to allow a second restructuring of loans to units facing cash flow problems, a funding lifeline for Small Industries Development Bank of India (SIDBI) and National Housing Bank, incentives to banks to on-lend to housing finance companies, and easing the regulatory norms for treatment of banks’ exposure to commercial real estate.

Leaving other key ratios such as the CRR (cash reserve ratio) and SLR (statutory liquidity ratio) unchanged, the RBI cut repo to 6.5 per cent from 7.5 cent and the reverse repo to 5 per cent from 6 per cent from December 8.

The revision in reverse repo comes after a gap of almost two-and-a-half years, the last being a hike by 25 basis points in July 2006.

Reduction in reverse repo is to encourage banks to lend more to the productive sector rather than parking their surplus funds with RBI.

(Repo is the rate at which RBI lends money to banks, while reverse repo is the rate at which it accepts surplus funds from banks).

Including the latest cut, the central bank has reduced the repo rate by 2.5 percentage points over the last two months.

‘Cooling off’ period

However, banks, which had reduced their lending and deposit rates last month after the first round of rate cuts by the RBI, appear unprepared for another cut immediately, some of them claiming they needed a “cooling off” period.

Mr T.S. Narayanasami, CMD, Bank of India, said the cut in repo and reverse repo rates are related to short -term liquidity: “As for banks effecting a cut in deposit and lending rates, we’ll have to see. The regulator has been forthcoming. So, banks will align rates to make credit affordable and make a difference to borrowers.”

The RBI Governor did note that there was slackening demand from borrowers as well as risk aversion on the part of banks. “Recent data indicate that the demand for bank credit is slackening despite comfortable liquidity…….Admittedly, there is some risk aversion and there is a tendency among banks to maintain more than adequate liquidity.”

A top SBI official said: “A general reduction in interest rates on assets and liabilities cannot be ruled out following RBI’s latest measures. We will take stock of the situation arising out of these measures. We will weigh the impact of our action in this regard on our depositors and also take into account the stimulus package that the Government is expected to announce shortly before taking rate action."

REAL ESTATE boost

In order to help ease the tight liquidity situation the real estate sector finds itself in, RBI has decided to extend concessional treatment to banks’ commercial real estate exposures which are restructured up to June 30, 2009. This would reduce the provisioning cost of banks lending to the sector.

Recognising the fact that in the current scenario of economic downturn even viable units could face temporary cash flow problems, the RBI, as a one-time measure, has decided that the second restructuring by banks of exposures (other than exposures to commercial real estate, capital market and personal/consumer loans) up to June 30, 2009 will also be eligible for exceptional regulatory treatment.

In a bid to boost lending to the housing sector, the RBI has decided that loans granted by banks to housing finance companies (HFCs) for on-lending to individuals for purchase/construction of dwelling units will now be classified under the priority sector, provided the housing loans granted by HFCs does not exceed Rs 20 lakh per dwelling unit per family. However, the eligibility under this measure will be restricted to 5 per cent of the individual bank’s total priority sector lending. This special dispensation will apply to loans granted by banks to HFCs up to March 31, 2010.

On the FCCB front, the RBI which has already allowed premature buyback of FCCBs issued by Indian companies, will now consider their buyback out of rupee resources: provided there is a minimum discount of 25 per cent on the book value of the FCCBs; that the buyback amount is limited to $ 50 million per company; and that the resources come from the internal accruals of the Indian company. If the Indian company has its own foreign exchange resources such as through EEFCs or fresh ECBs, the buyback could be at a discount of 15 per cent.

Micro/small enterprises

In view of the need to enhance credit delivery to the employment-intensive micro and small enterprises (MSE) sector, the RBI has decided to provide refinance to the tune of Rs 7,000 crore to SIDBI. The facility will be available at the prevailing repo rate under the LAF for a period of 90 days. During this 90-day period, the amount can be flexibly drawn and repaid. At the end of the 90-day period, the drawal can also be rolled over. This refinance facility will be available up to March 31, 2010.

The RBI is also working on a similar refinance facility for the NHB amounting to Rs 4,000 crore.

EXPORT CREDIT

In view of the difficulties faced by exporters on account of the weakening of external demand, the RBI said the prescribed interest rate as applicable to post-shipment rupee export credit (not exceeding BPLR minus 2.5 percentage points) would now be extended to overdue bills up to 180 days from the date of advance of the loan.

Related Stories:
Rate cut in the offing
More banks cut lending rates
RBI cuts cash reserve ratio yet again

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