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RBI nudges banks to lend by chopping reverse repo

Credit progress has been falling in previous couple of months, regardless of a slew of measures by the RBI.

By Ankur Mishra

Nudging banks to lend extra, the Reserve Bank of India (RBI) on Friday introduced a 25 foundation factors (bps) reduce within the reverse repo charge to three.75%. Reverse repo charge is the rate of interest at which the RBI borrows funds from banks. RBI governor Shaktikanta Das mentioned the transfer was to encourage banks to deploy surplus funds. Das additionally introduced that the liquidity protection ratio (LCR) of scheduled industrial banks will likely be introduced all the way down to 80% from the prevailing 100% with fast impact.

Banks have been going through problem as a result of shutdown following Covid-19 pandemic and a reduce in LCR requirement is more likely to handle their liquidity successfully. The LCR offers short-term resilience of banks to potential liquidity disruptions by making certain that they’ve ample high-quality liquid property (HQLAs) to outlive an acute stress situation lasting for 30 days. Das mentioned that the LCR requirement will likely be regularly restored again in two phases. “LCR will be brought to 90% by October 1, 2020, and 100% by April 1, 2021,” Das mentioned.

According to Krishnan Sitaraman, senior director, Crisil Ratings, LCR discount will assist lenders in a scenario when there will likely be discount in assortment because of moratorium. “Measures like reverse repo reduction will be incentivising banks to lend more,” he additional mentioned. According to Joseph Thomas, head of analysis, Emkay Wealth Management, banks are parking with RBI each day an quantity near Rs 6 lakh crore. “So, whatever money they have with them and whatever they are getting from RBI, the banks are giving back to RBI instead of investing it or lending it,” Thomas mentioned. The reverse repo charge reduce is to discourage reverse move to RBI, however is uncertain whether or not this may be stemmed simply, he added.

Credit progress has been falling in previous couple of months, regardless of a slew of measures by the RBI. The non-food credit score progress within the banking system for the fortnight ended March 13 stood at 6.07 % year-on-year (y-o-y), the bottom since May 2017. The year-to-date (YTD) credit score progress between March 31, 2019, to March 13, 2020, stood at 3.64 %, towards 10.72% a 12 months in the past.

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