ASSOCHAM calls for reduction in repo rates

New Delhi, Jan 17 (IBNS) With inflation showing signs of moderation and velocity of exports increasing, industry body ASSOCHAM on Tuesday called for 50 basis points reduction in repo rate to ease mounting cost of borrowings and at least one percentage point reduction in cash reserve ratio (CRR) to inject liquidity into the banking sector.

A one percentage point reduction in CRR could release Rs 56,000 crore and help fund viable projects held up due to liquidity crunch, it said ahead of the Reserve Bank of India's monetary review on January 24.

At the same time, CRR as applicable to banks must carry two to three per cent interest to ease cost of funds, said The Associated Chambers of Commerce and Industry of India (ASSOCHAM).

With food inflation now showing signs of cooling off, expectations of headline inflation coming below seven per cent by March have strengthened. The recent movement in inflation numbers has also heightened expectations among policy watchers of a likely reversal of monetary policy cycle.

At the same time, concerns over growth are now taking centre-stage with the most recent numbers on GDP pointing towards slowing growth momentum, said ASSOCHAM secretary general D.S. Rawat.

The aggregate deposits of banks outstanding on October-end stood at Rs 56.38 lakh crore. The CRR presently stands at six per cent. So one per cent or 100 bps reduction in CRR will inject about Rs 56,000 crore in the banking sector.

The non-food credit has four main components - agriculture and allied activities, industry, services and personal loans.

Gross bank credit extended to industry (micro, small, medium and large) outstanding as on November 18, 2011 was Rs 17.71 lakh crore compared to Rs 14.65 lakh crore a year earlier. In other words, scheduled commercial banks extended an additional credit of Rs 3.05 lakh crore to industry.

The benchmark prime lending rate (BPLR) of the largest lender in the country - the State Bank of India - was 12.5 per cent on October 21, 2010 and went up to 14.75 per cent from August 13, 2011.

If this is an average rate at which corporates get money, then there has been an increase of nearly 225 bps between October 2010 and November 2011 as there was no increase after the rate touched 14.75 per cent.

This increase of 225 bps on an additional credit of Rs 3.05 lakh crore would have led to an additional interest burden on the industry of almost Rs 6,878 crore.

Now if the RBI was to cut the repo rate by 50 bps and if the SBI follows the cue and cuts its prime lending rate by 50 bps, then the industry will save about Rs 1,528 crore in interest payments.

Giving even one per cent interest on CRR will release substantial relief by way of interest to the banking sector to counter growing borrowing costs.

"This is not a large amount as such and therefore a cut in repo rate at this juncture will be more symbolic and play on the sentiments. The real gains will be seen only when the cycle is completely reversed," said Rawat.

On the other hand, release of CRR cut of Rs 56,000 crore can be absorbed very quickly by additional government borrowing programme of Rs 40,000 crore. Besides, banks have put their funds into government securities more than they are required to.

Although the statutory liquidity ratio (SLR) is 24 per cent, banks are keeping nearly five per cent over requirement and can draw funds using this excess amount.

In fact, the RBI opened the marginal standing facility for banks to use this excess for borrowing money overnight.

Many banks have SLR of 27 per cent but still borrowing at liquidity adjustment facility (LAF) window as a lot of this is being invested in government securities. Since credit growth fuels growth, it is essential that funds flow into the economic activity.

"We are also seeing that credit growth has significantly slackened as compared to the previous year," said Rawat.