India releases Rs.250 bn more to improve liquidity (Roundup)

October 15th, 2008 - 8:20 pm ICT by IANS  

New Delhi, Oct 15 (IANS) Lending institutions will immediately get Rs.25,000 crore (Rs.250 billion or $5.5 billion) to give as credit to the fund-starved industry even as the cap on foreign funds in the corporate bond market was being doubled to $6 billion to address liquidity concerns, Finance Minister P. Chidambaram said Wednesday.”The Reserve Bank of India (RBI) has already issued an advisory to banks to enable smooth flow of credit to the borrowers of term loans as well as working capital,” Chidambaram told a hurriedly convened press conference here.

He said out of the money being released, the National Bank for Agriculture and Rural Development (Nabard) will get Rs.175 billion, while the rest will go to commercial banks.

“There will be no requirement of providing collateral.”

The amount, Chidambaram said, was being issued against the waiver of farm loans worth an estimated Rs.710 billion announced in February to bail out nearly four million small and marginal farmers across the country.

The finance minister said while hiking the limit for foreign funds in corporate bonds, the market watchdog will also address requests for relaxing the ratio of investment in equity and debt that they are required to maintain.

The central bank had over the past week reduced the cash reserve ratio, or the minimum cash banks have to maintain against deposits, by 150 basis points, to release Rs.200 billion into the financial system.

“After identifying liquidity as the main problem that has constrained the Indian financial system, a number of measures were taken between Oct 6 and today (Thursday). These measures have infused considerable additional liquidity into the market.”

The finance minister said that RBI Governor D. Subbarao, with whom he and Prime Minister Manmohan Singh reviewed the liquidity conditions in India Tuesday evening, was also expected to announce more measures in the coming days.

He said it was agreed at the meeting that credit to borrowers must be ensured at least to the extent of sanctioned amounts.

“The prime minister reviewed the financial situation, with particular reference to the liquidity position. The developments in, and measures taken by, other countries were also reviewed.”

It was noted at Tuesday’s meeting, also attended by Planning Commission Deputy Chairman Montek Singh Ahluwalia, that inter-bank lending remained a constraint.

“It is also important to enhance the credit limits where borrowers require more credit,” Chidambaram said, adding banks were able to access only Rs.35 billion from the special window of Rs.200 billion opened by RBI for liquidity to mutual funds.

This special scheme, for repurchase of government securities at a coupon rate of nine percent, which was to close Tuesday, has since been extended till such time it is fully subscribed.

According to Chidambaram, the central bank had already issued an advisory to the banks to enable smooth flow of credit to borrowers, especially to those for whom term loans and working capital has been sanctioned.

“The government is also issuing an advisory to public sector banks, impressing upon them the need to ensure easy draw down against sanctioned limits,” he said, adding they will also be asked to promptly respond to requests for any hike.

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