RBI move to up export refinance limit more of a placebo

Saikat Das
Moneycontrol.com

The Reserve Bank of India (RBI) on Monday enhanced the limit of export credit refinance to 50% of outstanding export credit as against 15% earlier. This move is expected to inject over Rs 30,000 crore liquidity in the system. However, bankers do not see any practical usage behind this, at least for the time being. This is more of a sentimental booster as they observe.

The mechanism works like this...

Besides the routine borrowings through RBI's repo window at 8%, banks can now raise more resources at the same rate to the extent of 50% of their loan exposure to exporters. This is generally fortnight (15 days) money unlike the overnight tenure in case of repo. This means, this is an additional window for banks to raise funds and thereby it will ease tight liquidity situation in the system. The estimated Rs 30,000 crore liquidity infusion suggests that banks' total exposure to exporters is around Rs 60,000 crore as on date.

The system, according to an executive director from a mid size public sector bank, is not going through any liquidity crisis.

"Now-a-days repo borrowings have fallen below Rs 1 lakh crore level as compared to Rs 1.50 lakh crore borrowing some 2/3 months back. It is currently hovering around RBI’s comfort zone. The system on an average has 3-4 times higher SLR bonds than repo borrowings. The demand for money has come down. It will continue to be like this till September," he told Moneycontrol.com on condition of anonymity.  

Banks raise money through repo by pledging SLR (statutory liquidity ratio) bonds. Banks have to mandatorily keep 24% of net demand and time liabilities in government bonds. A back-of-the-envelop calculation suggests, the entire banking system has an excess SLR of 2-3% on an average. The understanding is that if banks do not use their excess SLRs to exhaust the repo option, they may not be keen to use the export refinance opportunity.

"It (the enhancement) is not a relevant action, sans of real usage," said J Moses Harding, head of asset liability committee and economic market research, IndusInd Bank.

"This move can be seen as another MSF (marginal standing facility) window at repo rate. Only private and foreign banks with insignificant share of export finance can benefit out this. PSU banks can benefit only if call rates go up sharply than repo rate."

Rates are hovering around 8.20% on an average in the call money market, wherein banks lend to each other (inter-bank). Higher spread between call rate and repo rate is likely to help lenders to maintain their margins. 

RBI sees this enhancement of limit equivalent to a cut in cash reserve ratio, or the portion of deposits banks keep with RBI, currently pegged at 4.75%. It means that for deposits of Rs 100, banks need to set aside Rs 4.75. However, banks do not earn any interest on their balance with RBI on account of CRR. It is free money for them. Hence, bankers are not ready to call it a measure similar to CRR cut.

saikat.das@network18online.com