Talk is cheap, but cash is king. Though assurances and guarantees have eased sentiments, bankers say aversion among banks to sanction fresh loans will likely continue until the liquidity scare well and truly ends.
Many banks are still busy borrowing large amounts from the Reserve Bank of India, while policy-makers in New Delhi ponder measures to keep the cash taps flowing.
“Nothing has changed on the liquidity front. What the RBI is trying to tell banks is that they should not deprive companies of pre-sanctioned funds, which rightfully should flow to them,” said the chairman of a public sector bank, who did not want to be quoted.
The Reserve Bank of India (RBI) yesterday directed banks to disburse working capital and term loans to companies against the sanctioned limited. The central bank was responding to denial of credit to companies even in cases where the whole of sanctioned loans have not been utilised and all the terms and conditions of the sanction of the loans continue to be complied with.
“In view of the improved liquidity in the markets, the banks concerned are advised to review all such cases (sanctioned loans) and permit drawal of sanctioned limits, guided by their usual commercial judgment,” the RBI said.
About half of the number of 78 banks are short of liquidity and continue to borrow large amounts of overnight money from the RBI.
On Tuesday, banks borrowed over Rs 62,000 crore from the RBI. Banks’ borrowings on this scale continues despite the cut in the cash reserve ratio (CRR), the share of deposits banks must park with the RBI, by 1.5 percentage points with effect from October 11, which infused Rs 60,000 crore into the banking system.
Some banks do have more than adequate liquid funds but are conserving it instead of lending to other banks, for fear of getting stuck in a crisis if liquidity situation suddenly turns devastating.
“The reasons for tight liquidity conditions in the Indian market in recent weeks are quite different from the factors driving the global liquidity crisis. Some reasons include large selling by foreign institutional investors (FIIs) and subsequent RBI interventions in the foreign currency market, continuing growth in advances, and earlier increases in CRR to contain inflation,” said Roopa Kudva, Managing Director & CEO of CRISIL, the India subsidiary of global credit ratings firm, Standard & Poors’.