The latest measures of the reserve bank of India (RBI) giving banks access to more cash at lower interest rates will no doubt be welcomed by the market; a market does not exist which does not love handouts. What is important about the measures, however, is what they tell us about the points of weakness in the market.DOes this refer to RBI's "RBI allows Non-Deposit taking NBFCs to raise Short Term Foreign Funds with Prior Approval"First, there is the obscurely worded permission given to foreign financial institutions to borrow abroad. These institutions are at home in a foreign country, and do not need RBI’s permission to borrow there. It seems to be suddenly worried that so many foreign investment institutions are dumping Indian shares and shipping the proceeds abroad, and to be telling them that they can borrow abroad to continue holding the shares.
That has zilch to do with "foreign financial institutions". Non deposit taking NBFCs = Reliance Capital also, as far as I know. That this is not a big deal for foreign banks is not a concern of the RBI.
The RBI circular simply says NBFCs can tide over this crisis in the short term, but raising money abroad. I can't find any other RBI circular targeting only foreign banks.
Second, there is a cut in the cash reserve ratio (CRR) from 6.5 to 5.5 per cent in two instalments. Just what this delay in reduction achieves, apart from showing how important RBI is, is unclear. RBI says that the reduction will release Rs 40,000 crore into the economy. It will do nothing of that sort. It will increase by that much the credit banks can give without breaching the minimum CRR requirements. But banks are not obliged to give the credit; and given the uncertain financial status of potential borrowers in a shaky economy, banks are not likely to give fresh credit in a hurry. In these circumstances, the CRR serves no purpose. It is the banks' own cash that they are not allowed to use without RBI's permission.Is he kidding? It is not the bank's own cash, CRR is a percentage of deposits. Deposits are liabilities, cash is an asset. WTF?
CRR is basically a percentage of deposits that have to be maintained with RBI. SLR is another thingy - currently 24% - of all deposits that much be invested in specific government bonds or SLR-able instruments. Effectively, right now, RBI says you gotta put 24% of deposits in SLR, and 5.5% of deposits with RBI. The remaining you can do whatever you want with.
It's different in different countries - UK has no statutory requirement of a CRR, the US has 10% if a bank has over 45 million in deposits etc.
To say this is RBI asking banks to deposit part of their "own" cash is plain ignorance. This is a part of the banking system worldwide, and is either statutory or voluntary-with-enforced-reporting. If there was no CRR, the RBI wouldn't have reserve cash to provide temporary liquidity for a certain bank that had either a run or needs money urgent. And it reduces lending to that extent because if a banks has to keep cash in RBI, it can't lend it out.
Although RBI refuses to let banks use their own cash, it can never afford to let them run short of cash. So it graciously permits them to borrow their own cash under the laughable LAF — Liquidity Adjustment Facility — and charges them interest for doing so.What's weird about this - haven't you heard of overdraft facilities tied to fixed deposits? Effectively your bank is lending you your own money...and at a higher rate of interest. Now the banks are having the RBI do it to them. Poetic justice. The RBI is a bank. That's the middle initial. WTF.
Again, the author uses "own cash". Can't be a silly mistake there.
A fortnight ago, RBI had given banks special permission to lend to mutual funds which were facing a run, but only up to 0.5 per cent of banks' deposits, which RBI prefers to call Net Demand and Time Liabilities. Why the facility should be related to banks' liabilities and not mutual funds' is a secret RBI is not about to reveal.Grr. There are client risk limits that are not in this announcement, and have always applied on an individual bank basis, and that is alongside a bank's individual exposure limits, for heaven's sake.
What RBI really said was - you can lend to MFs AND you can borrow that money from the RBI through the LAF/Repo window. For that you gotta give SLR bonds as security if in the process you go below your SLR limits, then we will forgive you.
You could earlier lend to MFs but that money had to come from deposits only (beyond the SLR and CRR limit) - but now we see you're being a prick so we'll give it to you to give it to them. For a short time. Because they're screwed otherwise. This is a temp measure so keep your exposure short term to the MFs. And you can't borrow like a mad dog, just 0.5% of your total deposits ("time and demand liabilities").
Now, apparently, it is not only mutual funds that are in trouble; it has spread to non-bank finance companies (NBFCs) — mostly organisers of big equity and debt deals. So banks will be allowed to lend money to both up to 1.5 per cent of their deposits. The favour is not only temporary but ad hoc as well, available only till RBI looks up from its other concerns and reviews it. At that point, it will be further extended, though RBI would never say that.This gives the impression the author says "RBI is giving banks permission to lend money". Hardly the case.
What it's saying is: You are supposed to lend. You are not doing so. So I will.
But the RBI act doesn't allow me to lend directly. So I will give it to you, and you give it to them. You take the interest rate spread (diff between what I ask from you, and what you ask from them).
RBI's circular of 1 November is a typical case of its orotund, pompous and obscure style.The RBI *is* pompous and obscure. ("orotund"? WTF? You use "orotund" and call someone else "pompous"???) But this is hardly an example of that pomposity.
These are the kind of articles I will label "WTF" - short for "What the F?".
Note: I am an outsider to banking. I find this article glaringly inaccurate. What do the bankers think?
Related posts:
- RBI Cuts CRR by 100 bps again From last Friday's move to cut CRR by 1.5%, another...
- Interest Rates Drop, SLR lowered and more RBI has announced a 1% drop in Cash Reserve Ratio...
- ECB Rules Relaxed: RBI RBI has relaxed the ECB regulations in a notice posted...
- RBI Raises Rates – Why Are We Surprised? RBI raises rates in two phases - the repo rate,...
- RBI Cuts CRR another 1%, and still needs to pump cash RBI cuts CRR by another 1%. This will add 60,000...
>This seems more like a part of political propoganda to malign the RBI. The irony is that many a ‘layman’ will not be able to interpret the real situation and be a part of the herd and negative sentiment.
11.08.08 at 10:45 AM
>RBI has a tough role to play – we must accept. It figures among the top central banks worldwide, and many other central banks actually borrow RBI policies / opinions. Not to say that they do not screw up from time to time – they are humans who are also there for their self interests while trying to regulate markets. Definitely agree with Deepak on this one.
Come to think of it, like the stock exchange needs brokers to keep deposits/ margins, the RBI needs banks to keep deposits/ margins. I see of it as a chain which starts with the Stock Exchange/ RBI at level 1, and banks / brokers at level 2, and each of their customers at level 3. The Level 1 guy sets the rules/framework. In easy times margins are relaxed, prompting more transactions and activity. Moment something goes wrong, and the cycle turns, margins are tightened. Where-ever there is leverage, there will be margins :). This is survival instinct for each organisation to survive, and no one wants to go down under. As they say, in a Casino, the House never goes down under!
11.09.08 at 4:13 AM