Mumbai: The Reserve Bank of India on Saturday slashed both its repo and reverse repo rates by 100 basis points each, effective 8 December, and unveiled a host of measures as part of its stimulus package to “step up demand and arrest the growth moderation”. The rate cuts are expected to compel commercial banks to reduce their main lending rates. RBI governor D. Subbarao said, “we have spoken to bankers, there was an exchange of views and expect that banks will now respond to the signals given.”
With the latest cuts, the repo rate, or the rate at which the central bank infuses liquidity in the system stands at 6.5% and the reverse repo rate, or the rate at which it sucks out liquidity from the system, stands at 5%. Since 20 October, the Reserve Bank of India, or RBI, has slashed the repo rate by 250 basis points while it touched its reverse repo rate for the first time since mid 2006. One basis point is a hundredth of a percentage point. The central bank left other regulatory rates like cash reserve ratio and statutory liquidity ratio, or the portion of banks’ deposits required to maintain with the central bank as cash and government bonds, unchanged at 5.5% and 24% respectively.
RBI said the reduction in the repo and reverse repo rates will help in “reduction in the marginal cost of funds to banks and enable them to improve the flow of credit to productive sectors of the economy on viable terms”.
Subbarao said: “We are closely monitoring the liquidity situation and believe that the liquidity situation is more than comfortable. The liquidity adjustment facility is in absorption mode. The transmission of monetary actions takes time. These are uncertain times and there is risk aversion with lenders wanting to maintain more than adequate liquidity.’’
However, “I am only hoping that the measures send a positive and decisive signal,’’ added the RBI chief.
To help the employment-intensive micro and small enterprises tide over their credit needs, RBI also announced special refinance facility of Rs7,000 crore to the Small Industries Development Bank of India (SIDBI). The central bank is also working on a similar Rs4,000 crore refinance facility for the National Housing Bank (NHB) to extend its lendable resources.
The central bank has also permitted banks to consider applications for premature buyback of foreign currency convertible bonds, or FCCBs, provided there is a minimum discount of 15% on the book value of such FCCBs if the source of fund for the buyback is held in foreign currency. It will also consider buyback of FCCBs out of rupee resources if there is a minimum discount of 25% on such bonds’ book values and the buyback is limited to $50 million of the redemption value per company, RBI said. The resources should be drawn out of internal accruals of the company.
RBI said the decision to allow the buyback of FCCBs will help Indian companies to take advantage of the current discounted rates at which the FCCBs are trading.
As a one time measure to boost lending to the housing sector, RBI allowed banks to classify loans granted by them to housing finance companies, for on-lending to individuals, under priority sector lending, provided the housing loan disbursed by the housing finance company does not exceed Rs20 lakh. The eligibility under this measure will be restructured to 5% of the individual banks’ total priority sector lending, RBI said. The centarl bank said this special dispensation would apply to loans granted by banks to housing finance companies up to 31 March, 2010.
Banks are required to lend 40% of their fund to the priority sector which comprises agriculture, small and medium enterprises, education among others.
RBI has also extended “exceptional regulatory treatment” to banks’ exposure to commercial real estates, which are restructured up to 30 June 2009. Under the current guidelines, exposures to commercial real estate are not eligible for the exceptional regulatory treatment of retaining the asset classification of the restructured standard accounts in standard category.
“In the face of the current economic downturn, there are likely to be more instances of even viable units facing temporary cash flow problems,” RBI said.
“To address this problem, it has been decided, as a one time measure, that the second restructuring done by banks of exposures (other than exposures to commercial real estate, capital market exposures and personal/ consumer loans) up to 30 June 2009, will also be eligible for exceptional regulatory treatment.”
RBI in last week had doubled the time frame for export credit given at a concessional interest rate—from 90 days to 180 days—to help exporters who are facing difficulties on weakening demand for goods overseas. The loans, known as post-shipment credit, are offered at 250 basis points lower than banks’ main lending rates. The central bank now extended the facility to overdue bills as well for a period up to 180 days from the date of advance.
“Given the uncertain outlook on the global crisis, it is difficult to precisely anticipate every development,” said Subbarao adding that it will continue to closely monitor the developments in the global and domestic financial markets and will take swift and effective action as appropriate.
“The fundamentals of our economy continue to be strong. Once the crisis is behind us, and calm and confidence are restored in the global markets, economic activity in India will recover sharply. But a period of painful adjustment is inevitable,” added Subbarao.