New Delhi: The government on Friday said that the banking system is facing liquidity crunch as is reflected from increased borrowings by lenders from the Reserve Bank of India (RBI).
“The net borrowings by bank from RBI in the recent times, is a reflection of the deficit liquidity conditions,” finance minister Pranab Mukherjee said to a question in the Lok Sabha.
On an average, banks and primary dealers have borrowed Rs 46,298 crore on a daily basis from the RBI so far this fiscal (April-August).
This is marginally lower than the Rs 46,946 crore borrowed in the previous fiscal (2010-11). “Borrowings by banks from the RBI with the governments securities as a collateral is a normal liquidity management operation for banks and this happens whenever there is overall liquidity deficit in the system,” Mukherjee added.
According to the minister, during 2008-09 and 2009-10, banks have placed funds worth Rs 4,212 crore and Rs 1,00,310 crore with the RBI.
Banks invest in government securities as part of their statutory requirement to maintain the Statutory Liquidity Ratio (SLR), which is currently at 24%.
The RBI managed the day-to-day liquidity in the banking system through its Liquidity Adjustment Facility (LAF). Under this facility, banks which are short of liquidity can borrow from the RBI (overnight) at the Repo Rate (8%), by keeping government securities as collateral.
“This is in line with the best international practices,” Mukherjee added. He said that increased bank borrowings from RBI indicates the strengthening of the monetary transmission mechanism and is consistent with the anti-inflationary stance of monetary policy.
As part of efforts to control inflation, the RBI has hiked policy rates 11 times since March 2010. However, inflation continued to remain on higher trajectory. The overall inflation, which crossed the 9% mark in December 2010, stood at 9.22% in July.