RBI stimulus for strapped credit market

A day after the G20 global leaders’ meet on tackling the financial crisis, the Reserve Bank of India took the lead among central banks in

moving to boost credit markets. The central bank removed the additional capital requirement placed on lending to real estate and provided an additional Rs 22,500 cr for cheap export refinance.

To boost dollar inflows, the RBI has allowed housing finance companies to borrow abroad and raised the ceiling on interest rates that banks could offer on non-resident deposits. The refinance facility aimed at encouraging banks to lend to mutual funds and finance companies has been extended to end March and corporates have been allowed to buy back foreign currency convertible bonds which are now quoting at dirt cheap rates.

A good part of the measures announced were demands by industry at their interaction at various levels with the government. In a statement issued here, the RBI said the higher risk weightage on real estate was introduced as a counter cyclical measure and was being rolled back keeping in mind the global macro economic situation. The measures come less than 24 hours after Federal Reserve chairman Ben Bernanke said that global policy makers would remain in close contact, monitor developments closely and stand ready to take additional steps.

According to measures announced on Saturday, banks can now offer Libor/swap rates plus 100 basis points on FCNR(B) rates as against the current ceiling of 25 basis points over Libor. Similarly, on NR(E)RA deposits the ceiling has been raised from Libor/swap rates plus 100 basis points to 175 basis.

For buy back of FCCBs, the RBI said it would consider proposals to prematurely buy back their FCCBs. The buy back should be financed by the company’s foreign currency resources held in India or abroad and/or out of fresh external commercial borrowing (ECB) raised in conformity with the current norms for ECBs. Proposals in this regard would be considered under the approval route. Extension of FCCBs would also be permitted at the current all-in cost for the relative maturity.

Given the likelihood of an export slowdown the RBI has decided to raise the eligible limit of export credit refinance for banks to 50% of the outstanding export credit eligible for refinance. This will provide additional liquidity support of around Rs 22,000 crore to the banks.

The rate of interest charged on the ECR facility will continue to be the prevailing repo rate under the LAF which is currently 7.5%. To ensure there is funding for employment intensive sectors, the RBI has decided to allocate to SIDBI and the NHB a sum of Rs 2,000 crore and Rs 1,000 crore, respectively.