The Hindu : Business : Bankers apprise RBI of liquidity crunch

Online edition of India's National Newspaper
Wednesday, Mar 29, 2006

Business

Business

Bankers apprise RBI of liquidity crunch

Special Correspondent

Stiff competition from mutual fund industry in resource mobilisation

MUMBAI: Bankers on Tuesday met Reserve Bank of India (RBI) Governor Y. V. Reddy to apprise him of the tight liquidity situation in the banking system as deposit mobilisation lags behind credit growth.

"It was one of our regular meetings with the Governor prior to the Annual Policy announcement of the central bank and we appraised him of the ground realities, especially the growing demand for credit,'' said H. N. Sinor, Chief Executive, Indian Banks' Association (IBA).

With eight per cent growth in the economy, there is a demand for larger credit from across the sectors, said Mr. Sinor while talking to The Hindu. "However,'' he said, "deposit growth is much less than credit growth.''

"Infrastructure funding is a major area we highlighted to the Governor'' as major projects are coming up, including airports and ports, said Mr. Sinor, adding, "it also involves issues like raising huge funds to meet the growing demand.''

The RBI Governor is scheduled to announce the Annual Monetary Policy for 2006-07 on April 18.

Led by its Chairman, A. K. Purwar (Chairman, State Bank of India), the five-member team of IBA included IDBI Chairman V. P. Shetty, ICICI Bank Managing Director and Chief Executive Officer K. V. Kamath, Sanjay Nayar of Citi Group and Mr. Sinor.

Bankers also pointed out to the Governor the stiff competition faced by them from the mutual fund industry in resource mobilisation as there was a shift towards mutual funds by investors. "We also discussed with him issues related to the interest rate structure,'' said Mr. Sinor.

However, a few days ago, Finance Minister P. Chidambaram reportedly stated that availability of lendable money was not a cause for concern. "Liquidity is not a concern. But liquidity has to be maintained so that interest rates remain attractive to investors,'' said Mr. Chidambaram. He also had a meeting with bankers last week to discuss issues of liquidity in the system.

Cash reserve ratio

PTI reports:

It is learnt that the bankers discussed the issue of reducing the Cash Reserve Ratio (CRR), which refers to the percentage of funds that commercial banks are required to park with the RBI. Bankers were of the opinion that a two-percentage point reduction in CRR from the current level of five per cent could release around Rs. 40,000 crore in the system.

The banking system has been facing liquidity crunch, particularly after the RBI had hiked the repo rates by 25 basis points in its thrid quarter review of the monetary policy in January.

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