Only 4 bids from banks worth Rs 3,500 cr.

Funds crunch

Bankers say they do not have enough securities to pledge with RBI to borrow funds

Most banks do not have excess SLR securities against which they can borrow in the repo market

Our Bureau

Mumbai, Oct 14 The scheme announced by the Reserve Bank of India on Tuesday to provide liquidity to mutual funds, which are facing redemption pressure, turned out be a damp squib.

Out of the Rs 20,000 crore of short-term funds offered by the RBI at 9 per cent interest for on-lending to MFs, banks have availed themselves of only Rs 3,500 crore.

The reason, bankers say, is that they do not have enough securities to pledge with RBI to borrow funds.

According to RBI’s scheme, banks are allowed to lend money to MFs against Certificate of Deposits (CDs) for a period of 15 days from October 14. Banks have also been permitted to buy back their own CDs from MFs. In the special auction for purchase of securities of Rs 20,000 crore held today, RBI received only four bids worth Rs 3,500 crore.

Analysts estimate that MFs hold Certificate of Deposits worth more than Rs one lakh crore.

According to bankers, the problem is that most banks do not have excess SLR securities against which they can borrow in the repo market. And many banks are still on the borrowing side, as is evident from the RBI’s daily repo and reverse repo auctions.

“What little excess SLR we have, we are using for our own requirements. We do not have enough to extend for raising money for MFs,” said a PSU bank official.

In the past few days there have been demands from several sections of the market asking for SLR status for instruments such as Triple ‘A’ rated PSU bonds. Currently only Government securities and T-Bills enjoy SLR status, and can be used as collateral to borrow through the repo window.

Tuesday’s scheme has provided only an ‘imaginary confidence’ to the market, said a bank official.

About the RBI allowing banks to buy back their own CDs, the head of treasury with a private bank said, “It reflects the huge asset-liability mismatches that MFs have built up.” Another issue is that while lending against CDs, banks would insist on a discount to the interest rate, which means the MFs could end up booking losses. “Banks which have issued CDs will not buy them back because they will look to make a profit,” said the PSU bank official.

Most of the MFs have approached banks for funds after RBI’s announcement, according to bankers.

“Towards the end of the quarter, MFs do borrow from banks. But this time, MFs have even been asking us to give them an overdraft facility, something which is not allowed,” said a bank official.

Related Stories:
Call rates drop below 10% as CRR cut brings cheer to money market
Stocks plumb new depths
RBI cuts cash reserve ratio
Banks tapping CD market as CRR hike begins to bite

(This article was published in the Business Line print edition dated October 15, 2008)
XThese are links to The Hindu Business Line suggested by Outbrain, which may or may not be relevant to the other content on this page. You can read Outbrain's privacy and cookie policy here.