Banks seek RBI help to resume infra lending

 WITH just two days left for Reserve Bank of India's (RBI) quarterly review of Annual Monetary Policy, heads of large banks have told the RBI that it would be impossible for them to fulfil the government's directive to lend to the infrastructure sector, unless RBI eases norms on reserve requirements.
    Bank chiefs have called for a change in norms on cash reserve ratio (CRR) and the statutory liquidity ratio. CRR is the portion of deposits which banks have to maintain as cash with RBI, while SLR is the proportion of deposits which they have to hold in the form of securities, gold and cash. Currently, banks have to maintain 6.5% of deposits as CRR, while 25% must be held as SLR. Cash kept as CRR does not fetch any interest for the banks.
    The meeting with a deputy governor of RBI came just a day after they met the Union finance minister in New Delhi.
    On Monday, the finance minister had met the chiefs of seven stateowned banks and urged them to lend to corporates. On Tuesday evening, bank chiefs made out a strong case to RBI officials to exempt banks from reserve requirements such as SLR and CRR for long-term deposits.
BANKERS' BLUES T H E B A C K G R O U N D Banks have been paying more for long-term funds Due to this, they need to charge core borrowers more Currently, banks charge around 15% for infra projects They fear corporates may not be able to service them T H E D E M A N D Exemption for long-term deposits Aid for banks facing issues with reciprocal credit lines Room to offer higher rates on foreign money Worry over lines of credit from abroad
    THE money thus raised could be used to fund infrastructure projects, they said. An easing of rules on this count could help reduce their cost of fund for long-term bonds, a senior banker said.
    Banks have been discouraging firms promoting infrastructure projects because the interest rate on these projects is 13-15%. "It is not that there are defaults. We only feel that these rates are too high to be serviced by infrastructure companies," a senior banker said.
    Another reason behind their reticence is that the share of long-term deposits (for three years and above) in the overall basket has come down to 11%, compared to 25% three years ago. This indicates that banks would have to pay a higher rate to attract long-term deposits and therefore, they would be forced to charge higher interest rate on long-term loans. However, if longterm deposits do not attract reserve requirements, their cost of funds would come down automatically.
    The bank chiefs also sought financial support for their overseas operations, said sources close to the development. Domestic banks with overseas operations are worried over foreign banks not rolling over reciprocal lines of credit. Indian banks with overseas presence have a reciprocal line of credit with their foreign counterpart. Under this arrangement, the Indian bank lends to the foreign bank's branch here while the foreign bank extends a similar support to the Indian bank's overseas arm. Since reciprocal lines of credit are not being renewed, some banks are remitting dollars out of India to sustain their overseas operations.
    The banks also told RBI to allow them to offer a higher interest rate on foreign currency deposits. The RBI now caps the interest rates which banks can offer on such deposits. For FCNR(B) deposits, banks can offer 25 basis points over Libor and for NRE deposits, banks can offer 100 basis points over Libor.