RBI keeps vigil on surplus liquidity

RBI keeps vigil on surplus liquidity
The Financial Express, November 11, 2009, Page 1

fe Bureau, Mumbai

The Reserve Bank of India (RBI) is monitoring the liquidity situation closely and will take necessary action as and when required, RBI deputy governor Shyamala Gopinath said on Tuesday. She was speaking at the India China Financial Conference 2009, organised by the Indian Banks’ Association.

“We are monitoring the liquidity situation closely and depending on the situation, will take action,” said Gopinath on asking if the central bank would drain the excess liquidity in the system through the use of open market operations. Talking about the low credit growth in the banking system, Gopinath said the lower growth may not be reflecting true demand conditions in the economy.

“Low credit growth is a concern for the RBI. One has to take into account other sources of finance for companies. We are seeing companies raise money through debt markets, bonds, commercial papers, external commercial loans and from the equity market,” she said.

Highlighting the strength of the Indian banking system amidst global financial crisis, she said it is noteworthy that notwithstanding the pressures of a slowdown, the net NPA to net advances ratio increased marginally to 1.1% as on March 2009, from 1% recorded in the year-ago period.

Significantly, gross NPA to gross advances ratio remained constant at 2.3 %. Thus, in terms of the two crucial indicators-capital and asset quality-the Indian banking sector has exhibited resilience amidst testing times.

It is noteworthy that contrary to the trend in some advanced economies, the leverage ratio (Tier-I capital to total assets ratio) in India has remained high, reflecting the strength of the Indian banking system. The growth rate of consolidated balance sheet of banks decelerated to 21.2% in 2008-09 from 25% a year ago. The growth rate was, however, higher than the nominal gross domestic product (GDP) (at current market prices) resulting in a higher ratio of assets of banks to GDP, she said.

On credit growth, Gopinath said, overall credit demand from the manufacturing sector slowed down reflecting a decline in commodity prices and drawdown of inventories. Two, corporates were able to access non-bank domestic sources of funds and external financing - which had almost dried up during the crisis - at lower costs. Three, unlike in the previous year, oil marketing companies reduced their borrowings from the banking sector as oil prices moderated. Four, a significant amount of bank finance has gone to the corporate sector through banks’ investment in units of mutual funds. Five, banks have also reined in credit to the retail sector due to the increased risk on account of the general slowdown. This credit retrenchment was more pronounced in the case of foreign banks and private banks, she explained.

On the 70% provision coverage norm for banks, Gopinath said banks can maintain more than 70% as per their asset quality. On whether RBI is looking at increasing the minimum provisioning ratio for sub-standard and other such asset buckets, she said RBI is looking at the resilience of banks and wants them to set aside profit for future buffer.

Talking about inflation, Gopinath said India is facing a challenge of an upturn in inflation, which has started heading upwards after staying at very low levels.

“The timing of the withdrawal of monetary policy might diverge considerably between developed and emerging nations. We really need to consider the exit from expansionary policy because we cannot be an outlier here,” said Gopinath. The fiscal consolidation is also likely to pose a major challenge for the government in the future, but as such the current account and fiscal deficits are manageable, she added.