Banks continue to park excess funds with RBI
By Neelima Shankar
Apr 29, 2009
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Although the central bank slashes key policy rates by 25 basis points, banks continue to park funds with it under the reverse repo window.

The banking regulator, RBI cut the reverse repo rate to 3.5% with a view to discourage banks from parking their excess funds with it and thereby extending them to the productive sectors of the economy. However the slowing credit off-take is prompting banks to take the advantage of the interest rate differential between CBLO and RBI's reverse repo window.

Collateralized Borrowing and Lending Obligation (CBLO) is a mechanism under which banks borrow money against their surplus government securities at a lower rate and thereby park those funds at a higher rate with the RBI under the reverse repo window.

Following the reverse repo cut, banks have parked nearly Rs 1 lakh crore daily on an average with the RBI.

Towards the end of March 2009, schedule commercial banks investment in Statutory Liquidity Ratio (SLR) securities raised to 28.1% from 27.8%, a year ago. The investment in SLR securities comprise of net demand and time liabilities (NDTL) that banks necessarily have to park in government securities.

As per the RBI data, banks were holding nearly Rs 1,13,817 crore worth of excess government securities. These were 2.7% above the prescribed SLR limit of 24% by the RBI.

At the starting of April, when interest rates in CBLO had been as low as 0.50% banks made an enormous yield of about 3% per day by investing the money with the RBI.

The trend is supposed to be followed due the ongoing slowdown. "Feeble credit offtake coupled with the fear of bad loans going up in the current scenario of economic slowdown is prompting banks to park their surplus funds with the RBI. Not many bankable loan proposals are coming our way. So, it's a Hobson's choice for us," said a senior banker at a PSU bank.

According to the RBI data, scheduled commercial banks have put in around Rs 1,429 crore with the RBI in the fortnight ended April 10th, 2009.

Therefore after analyzing banks continuously parking funds with RBI despite of the cut in key policy rates and adequate liquidity, market analyst feel that RBI should come out with measures like putting a cap on the maximum amount that can be parked by the banks.


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