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April 10, 2002 | 1105 IST
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RBI unlikely to lower bank rate

P Vaidyanathan Iyer & Subhomoy Bhattacharjee

The Reserve Bank of India is unlikely to cut the bank rate, given the huge investments piled up by the public sector and private commercial banks in government securities.

"Such large investments, over and above the statutory liquidity requirement, render any rate cut ineffective," said government sources.

The statutory liquidity ratio investments of nationalised and even new private banks are well over 40 per cent of the net demand and time liabilities, compared to the mandated 25 per cent.

SLR investments compiled by the finance ministry show that as on February-end 2002, new private banks topped the chart with almost Rs 325.26 billion, or 43 per cent of their NDTL, parked in approved SLR instruments. State Bank of India, with its affiliates, follows closely with 40.5 per cent.

Finance ministry sources added the SLR maintained by SBI and its affiliates peaked to 40.5 per cent of their NDTL, or Rs 1,490.95 billion, as on February-end and that of other nationalised banks stood at Rs 1,963.35 billion, or 33.9 per cent of their NDTL.

Officials said the RBI was, therefore, in no tearing hurry to cut the bank rate, even after the Credit and Monetary Policy, scheduled to be announced on April 29.

A rate cut by the RBI would not necessarily improve the flexibility of the banks to cut lending rates, they added. The apex bank had cut the rate to 6.5 per cent in October last year. At this level, it is the lowest since May 1973.

Finance ministry officials pointed out that banks with such huge investments in gilts were virtually sitting on a landmine.

They noted that even a slight hardening of interest rates could erode the value of gilt investments held by the banks. Moreover, parking funds in gilts much in excess of the SLR requirement reflected the banks' aversion and inability to lend as well as the huge liquidity in the system, they added.

Since a pick-up in credit offtake would not be surprising given that the GDP growth rate in the third quarter of 2001-02 improved to 6.3 per cent, banks would do well to take a re-look at their portfolio of investments, the officials said.

Old private banks and nationalised banks, excluding SBI, had SLR investments of Rs 260.68 billion and Rs 1,963.35 billion, respectively.

While for the old private banks, it accounted for about 35 per cent of their NDTL, for the nationalised banks it was about 34 per cent. Even foreign banks invested over 30 per cent of their NDTL, or Rs 245 billion, in SLR instruments.

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