After extensive consultations among top policy makers including Prime Minister Manmohan Singh, the government on Wednesday announced fresh liquidity enhancement measures including immediately releasing Rs 25,000 crore to banks on account of the farm debt waiver and relief scheme, a plan to enhance the capital adequacy ratio for Indian banks, as well as doubling the limit on foreign institutional investment (FII) in corporate bonds to $6 billion annually.
The government is also issuing an advisory to public sector banks to disburse funds to companies and actively participate in inter-bank lending.
Announcing the measures, Finance Minister P Chidambaram said the Reserve Bank of India had agreed to release Rs 25,000 crore immediately to lending institutions. The money will be made available to the commercial banks (Rs 7,500 crore) and to the National Bank for Agriculture and Rural Development (Rs 17,500 crore) without any collateral.
In effect, this money, which is the first instalment of the three-year farm debt waiver scheme, is being released a fortnight earlier than the scheduled November 1. Meanwhile, government hopes Parliament will clear the first supplementary demand for grants within days of convening on October 17.
Separately, in a move to strengthen the Indian banking system, Chidambaram said the government had decided to enhance the capital adequacy ratio of banks, a step that it will fund. Operational details of the plan are being worked out.
"We will provide the banks access to finance in order to raise the capital to risk-weighted assets ratio (CRAR) of banks, which are now between 10 and 12 per cent, to reach 12 per cent by a suitable date in the future," he added.
"Our banks are well capitalised. Their CRARs are well above the Basel norm of 8 per cent and the RBI's 9 per cent. No bank has a capital adequacy of less than 10 per cent," Chidambaram said.
From October 6 onwards, a number of steps have been taken to ease liquidity in the financial system. These include a 150-basis-point cut in the cash reserve ratio, or the proportion of deposits bank must keep with the RBI, which has added Rs 60,000 crore in liquidity, and a special window of Rs 20,000 crore to mutual funds.
"The government is also issuing an advisory to public sector banks impressing upon the banks the need to ensure easy drawdown against sanctioned limits; appraise promptly requests for enhancement of credit limits; and continue to participate actively in the inter-bank call money market," Chidambaram said.
The RBI has already issued an advisory to the banks to enable smooth flow of credit to borrowers of term loans and working capital.
To encourage overseas inflows, the government has doubled the limit of FIIs in corporate bonds from $3 billion to $6 billion.
"The Securities and Exchange Board of India has informed me that it will address any requests for relaxation in the proportion of investment in equity and debt required to be maintained by an FII under current regulations," Chidambaram said.