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Banks to move away from cash-credit product

The Reserve Bank of India (RBI)’s decision to increasingly move away from the overnight repo facility to a term repo facility has prompted lenders to reconsider their short-term product profiles.

Banks offer a one-day cash credit facility to borrowers; much of the demand is met through the daily liquidity adjustment facility (LAF). Banks borrow from RBI’s LAF window at the repo rate, currently eight per cent.

The Urjit Patel committee, set up by RBI to review the monetary policy framework, had said there was a need to move away from the overnight window to a spectrum of windows of various maturities. Following this, the central bank had introduced the seven- and 14-day term repo windows from which banks borrowed at a market-determined rate.

Along with introducing term repo windows, RBI continued with the cap on repo borrowings through the overnight window. Last year, it capped bank’s borrowings from the daily LAF facility at one per cent of their net demand and time liabilities (NDTL) to make rupee liquidity scarce and stem a sharp fall in the rupee.

“Globally, there is no cash-credit product. There is a need to have a fixed-tenure product that is more stable. Banks are not supposed to undertake the borrower’s cash management responsibility,” said C V R Rajendran, chairman and managing director, Andhra Bank.

Bankers said the over-time cash credit product, through which borrowers secured funds for a day, had to be done away with, as the central bank had emphasised the need to move away from the daily window. “Through the cash-credit product, the borrower can draw the entire limit sanctioned. If banks borrow from RBI for seven or 14 days to lend and the borrower returns it in a single day, there will be liquidity issues for the bank,” said a senior executive at a large public sector bank.

On Wednesday, State Bank of India Chairperson Arundhati Bhattacharya had said, “This gradual shift from one-day to a term repo window will also impact the product range we have at banks. We have a cash-credit product, through which a company can come and do one-day borrowing. Basically, companies’ treasury management also gets devolved onto banks.” she said.

“We also need to think whether we can afford to continue to give that kind of a product to companies…where companies will be now asked to take seven-day borrowing. So, for the treasuries of individual institutions, companies or banks, this one-day management will actually be phased out, or is in the way to be phased out,” she added.

On Tuesday, RBI had said it would continue to provide liquidity under seven- and 14-day term repos of up to 0.75 per cent of the banking system’s NDTL. It had also reduced the liquidity provided under the export credit refinance (ECR) facility from 50 per cent of the eligible export credit outstanding to 32 per cent, with immediate effect. To compensate for the loss under the ECR scheme, it had introduced a special term repo facility of 0.25 per cent of NDTL. The move was aimed at improving monetary policy transmission across the interest rate spectrum, and signalled moving away from sector-specific liquidity.

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