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Collateralised lending finds few takers, to be phased out

BS Banking Bureau

CREDIT POLICY

The Reserve Bank of India has decided to phase out the collateralised lending facility to banks with effect from the fortnight beginning October 5, on the back of under-usage of the facility.

Scheduled commercial banks are provided CLF against the collateral of excess holdings of dated government securities and treasury bills over their statutory liquidity ratio requirement.

As per the existing system, the extent of liquidity support available to each bank under CLF has been stipulated at 0.125 per cent of its fortnightly average outstanding aggregate deposits in 1997-98.

Accordingly, the overall limit for the system stands at Rs 6.57 billion. But the average utilisation of this facility in 2001-02 up to the fortnight ended March 22 was only Rs 1.24 billion.

The central bank, however, has kept the option to reintroduce CLF for a temporary period in future, if the liquidity condition changes. Money market dealers said the measure will not affect call money rates or government security yields.

The treasury head of a private sector bank said: "Anybody hardly accesses this facility nowadays as there is liquidity overhang in the system.

"Moreover, the RBI has been bridging the temporary mismatch in demand and supply of liquidity through liquidity adjustment facility operation.

"So stopping the banks' access to CLF will effect neither the call rates nor the secondary market trading of government paper."

At present, RBI is providing standing liquidity facilities through export credit refinance and liquidity support to primary dealers in addition to CLF and LAF.

According to the central bank: "With the inherent superiority of the LAF in moderating liquidity in the financial system, both banks and PDs have tended to rely to a predominant extent on LAF."

It added that with the development of the inter-bank repo market and operationalisation of Clearing Corporation of India Ltd, the standing facilities could be phased out.

Accordingly, CLF may be phased out with effect from the fortnight beginning October 5, 2002."

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