Cash-strapped banks make a beeline to redeem US-64 units
Tamal Bandyopadhyay
MUMBAI, January 22: Reeling under the worst-ever liquidity crisis in the current fiscal, banks are making a beeline to redeem units of US-64 to generate funds. The other avenues being explored are distress sale of securities and wooing cash-rich public sector undertakings (PSUs) for certificate of deposits (CDs). Efforts are also on to knock at every refinance window available in the banking system.A clutch of banks are even planning to default in maintaining the stipulated 10.5 per cent cash reserve ratio (CRR) as the penalty on default will work out cheaper than borrowing money from the overnight call market to maintain the CRR. The overnight call rates closed at 60-70 per cent on Thursday. Bank of Baroda (BoB) alone redeemed Rs 160 crore worth of units of US-64 on Wednesday. According to industry sources, total redemption by the banks would be around Rs 400 crore this week. The total redemption of US-64 between July-December last year was pegged at Rs 720 crore. "This is the most liquid instrument
of all investments. The distress sale of securities will backfire as the yield to maturity (YTM) of gilts will go down further and banks will have to take the hit at the end of the year," treasury head of a large public sector bank said. Desperate to generate liquidity, some banks have started entering into reverse swaps even though it will prove expensive as forward premiums have hit the roof. "The choices are limited. We expected the CRR to be slashed to 8 per cent by March-end. Instead, the Reserve Bank hiked it to 10.5 per cent, sucking out 12,500 crore from the system. There is no way we can cover our position without resorting to market borrowing or entering into reverse swaps to generate rupee resources," chairman of a state-run bank said. Talking to The Financial Express, BoB chairman K Kannan said, "There is tremendous pressure on rupee resources. Corporates are pre-paying their FCNR(B) loans and shelving plans to raise ECBs to switch over to rupee loans. This will continue for the next
two months and we will have to generate short term funds at a higher cost." BoB will not rollover the commercial papers (CPs) when they mature. "We cannot walkout of the existing CPs till they mature. For the time being we will have to go for high-cost deposits," Kannan said. Banks have started wooing the cash-rich PSUs for CDs besides jacking up the interest rates on short-term deposits between two and four percentage points.Foreign and new private sector banks are worst affected by the high call rates as they always do the tight-rope walking on the liquidity front. A majority of the public sector banks have turned borrowers in the call market with institutions making a kill by lending at high rates.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
|
