RBI needs unconventional measures to boost liquidity

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RBI needs unconventional measures to boost liquidity

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MUMBAI: Bank chiefs have said that mutual funds, corporates and some private lenders are facing a liquidity crunch and the Reserve Bank of India (RBI) needs to take unconventional measures to unfreeze the markets in the coronavirus crisis. “All cash collections and consequently cash flows have gone into a freeze. Mutual funds are facing redemption pressure and unprecedented selling has hit bond markets,” said a bank chief.

Bankers said that most of RBI’s measures have been conventional — providing additional liquidity to banks through repos and open market operations. However, given the distressed situation of businesses, banks cannot provide loans. “The US Fed has taken some really exceptional measures to prevent a credit freeze. Other central banks are taking similar steps. Many were expecting the RBI to announce its package on Monday,” said the chief of a second public sector bank.

On Monday, HDFC Bank chief Aditya Puri said that there was no choice but to provide forbearance to borrowers. The Basel Committee on Banking Supervision — a global bank watchdog group — on Friday discussed easing rules to avoid banks facing huge provisions for supporting companies hit by the coronavirus crisis.

Puri said that his bank had over Rs 35,000-crore surplus funds but had a simple condition for lending — borrowers should demonstrate that there will be cash flows to be able to make the repayment. The government has nudged public sector banks to provide additional credit lines, but they say providing cash support without assurance is difficult.

In the US, the Federal Reserve has re-introduced a term asset-backed securities facility that was there during the global financial crisis. It has also enabled employers to claim funds through primary market corporate credit facility and secondary market corporate credit facility. Smaller lenders are seeing demand for funds from state governments where different departments are drawing the deposits. “Once the damage is done, it is difficult to come back. Companies are not able to keep up their commitments and are sitting on potential defaults. What is needed is a 15-day or a one-month window where everything is frozen,” said a banker.

Obligations include letters of credit that come up for payment, taxes, and salaries which the government has asked all employers not to hold back. Bankers said that while the economic package can take some time, liquidity is a problem for some players and the RBI needs to provide a window for mutual funds to raise funds.

Source- Times of India.