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RBI unveils more measures to enhance Rupee & Forex Liquidity and Credit

November 15, 2008: Global financial conditions continue to be uncertain and unsettled with ripple effects on domestic money, forex and credit markets. There are indications that the global slowdown is deepening with a larger than originally expected impact on the domestic economy, particularly for the demand conditions in the medium and small industry sector and export-oriented sectors. In the context of these developments, further augmenting rupee and forex liquidity, strengthening credit delivery mechanisms and improving credit delivery are imperative for sustaining the growth momentum. Particular attention needs to be paid to maintaining the viability of sectors that contribute significantly to employment and exports.

On a further review of the evolving developments, the Reserve Bank has decided to take the following measures:

Enhancing Rupee Liquidity

(i) The special term repo facility, introduced for the purpose of meeting the liquidity requirements of MFs and NBFCs will continue till end-March 2009. Banks can avail of this facility either on incremental or on rollover basis within their entitlement of up to 1.5 per cent of NDTL.

Enhancing Forex Liquidity

Foreign Currency Non-Resident (Banks) [FCNR(B)] Scheme

(ii) Currently, the interest rate ceiling on FCNR(B) deposits is fixed at Libor/Swap rates plus 25 basis points for the respective currency/ corresponding maturities. In view of the prevailing market conditions, it has been decided to increase the interest rate ceiling on FCNR (B) deposits by a further 75 basis points, i.e., to Libor/Swap rates plus 100 basis points with immediate effect.

Non-Resident (External) Rupee Accounts [NR(E)RA]

(iii) Currently, the interest rate ceiling on NR(E)RA is set at Libor/Swap rates plus 100 basis points for US dollar of corresponding maturities. It has now been decided to increase the interest rate ceiling on NR(E)RA deposits by a further 75 basis points, i.e., to Libor/Swap rates plus 175 basis points with immediate effect.

Housing Finance Companies

(iv) It has been decided to allow, as a temporary measure, housing finance companies (HFCs) registered with the National Housing Bank (NHB) to raise short-term foreign currency borrowings under the approval route, subject to their complying with prudential norms laid down by the NHB. Details in this regard are being notified separately.

Buy-back/Pre-payment of Foreign Currency Convertible Bonds (FCCBs)

(v) On account of the global developments, FCCBs issued by Indian corporates are currently trading at a discount. There is a benefit to the company concerned as well as to the economy if corporates buy back the FCCB at the prevailing discounted rates. In view of these potential benefits, Reserve Bank of India will consider proposals from Indian companies 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 will be considered under the approval route. Extension of FCCBs will also be permitted at the current all-in cost for the relative maturity.

Credit Delivery

(vi) In view of the difficulties being faced by exporters on account of the weakening of external demand, it has been decided to extend the period of entitlement of the first slab of pre-shipment rupee export credit, currently available at a concessional interest rate ceiling of the benchmark prime lending rate (BPLR) minus 2.5 percentage points from 180 days to 270 days with immediate effect.

(vii) At present, the ECR limit is fixed at 15 per cent of the outstanding rupee export credit eligible for refinance as at the end of the second preceding fortnight. The aggregate limit of ECR is currently around Rs.9,500 crore. It has now been decided to enhance the eligible limit of the ECR facility for scheduled banks (excluding RRBs) to 50 per cent of the outstanding export credit eligible for refinance. This will provide additional liquidity support to banks of an amount of about Rs.22,000 crore. 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 per cent.

(viii) Taking into account the need to ensure the growth momentum in the employment-intensive sectors of micro and small enterprises and housing, it has been decided to immediately allocate amounts, in advance, from scheduled commercial banks for contribution to the SIDBI and the NHB to the extent of Rs.2,000 crore and Rs.1,000 crore, respectively, against banks’ estimated shortfall in priority sector lending in March 2009. The allocation now made in respect of SIDBI and NHB will be adjusted against the banks’ actual achievement of the target/sub targets for priority sector lending as at the end of March 2009. The bank-wise allocations are being notified separately.

(ix) In order to provide further comfort on liquidity and to impart flexibility in liquidity management to banks, on November 1, 2008, the Reserve Bank introduced a special refinance facility under Section 17(3B) of the Reserve Bank of India Act, 1934 under which all scheduled commercial banks (excluding RRBs) are provided refinance from the Reserve Bank equivalent to up to 1.0 per cent of each bank's NDTL as on October 24, 2008 at the LAF repo rate up to a maximum period of 90 days. Banks are encouraged to use this facility for the purpose of extending finance to micro and small enterprises.

(x) As a counter-cyclical prudential measure, the general provisioning requirement on standard advances for residential housing loan beyond Rs.20 lakh has been progressively increased from 0.25 per cent to 1.0 per cent, while that on standard advances in the commercial real estate sector, personal loans including outstanding credit card receivables, loans and advances qualifying as capital market exposure and non-deposit taking systemically important NBFCs has been progressively increased from 0.25 per cent to 2.0 per cent. In view of the current macroeconomic, monetary and credit conditions, it has been decided, consistent with the practice of dynamic provisioning, that the provisioning requirements for all types of standard assets will stand reduced to a uniform level of 0.40 per cent except in case of direct advances to agricultural and SME sector which shall continue to attract provisioning of 0.25 per cent, as hitherto. The revised norms will be effective prospectively, but the provisions held at present should not be reversed.

(xi) Similarly, risk weights on banks’ exposures to certain sectors, which had been increased counter cyclically, are also being revised downward in view of the current macroeconomic, monetary and credit conditions. All unrated claims on corporates shall attract a uniform risk weight of 100 per cent as against the risk weight of 150 per cent for such exposures prescribed earlier which was applicable for exposures above Rs 50 crore from April 1, 2008 and for exposures above Rs 10 crore from April 1, 2009. Claims secured by commercial real estate shall attract a risk weight of 100 per cent as against the earlier risk weight of 150 per cent. Claims on rated as well as unrated non-deposit taking systemically important non-banking financial companies (NBFC-ND-SI) shall be uniformly risk weighted at 100 per cent. As regards the claims on asset financing companies (AFCs), there is no change in the risk weights, which would continue to be governed by the credit rating of the AFCs, except the claims


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