Banks taking demand loan from RBI coincides with Rel Power IPO

Banks took demand loans from the Reserve Bank of India for the week ended January 18. This move of the banks has corresponded with the opening of the Rel Power IPO.

According to sources, this happens very rarely as most of the requirements of the banks are first met through call market borrowings and after that if there is any requirement then through the repo window of RBI . Under the repo, banks borrow funds from RBI by guaranteeing government securities.

CALL FOR LOAN

· Under the repo, banks borrow funds from RBI by pledging government securities. Thereafter in cases of extreme crisis or need for funds, the route for demand loans is sought, which is usually at a higher rate compared to the repo rate of 7.75 per cent

· Call rate is the interest rate for lending and borrowing of funds by the banks for daily fund requirements

· Since the week coincides with the opening of the IPO of Reliance Power with an issue size of around Rs 12,000 crore, it is believed that most of the banks have borrowed in excess for on-lending to retail and institutional investors to participate in the IPO


Then in case of extreme crisis or need for funds, the route for demand loans is searched, usually in which the rate is high as compared to the repo rate of 7.75 per cent .

Call rate is defined as the interest rate for lending and borrowing of funds by the banks for daily fund requirements.

Sources keeping a close eye on the developments said that the borrowings made by 15-odd banks through the demand loan route has observed an increase of Rs 4128 crore week over week. Sources said mostly the balance remains smooth at around Rs 100-150 crore.

Since the week has coincided with the opening of the initial public offer of Reliance Power with an issue size of around Rs 12,000 crore , it is being thought that most of the banks have borrowed in excess for on-lending to retail as well as institutional investors to participate in the IPO.

Under section 17 of the RBI act there is a provision for the borrowing as demand loans from RBI.

However IPO has resulted in a temporary and artificial shortage of funds in the market which is keeping the interest rates rather high at 7.5/8 per cent. Dealers are of view that the call rates will ease from Thursday onwards when the refunds start coming in.

Also, last week the call rates had gone up to a high of 60 per cent when real time gross settlement got swamped with settlement orders and the system stopped settlements for an hour.

As per market sources, the settlement needs to be done for each market — call, government securities and foreign exchange — more than once in order to avoid such delays.

Besides this the functioning of the RTGS have major effect on monetary policy as any delay in payment and clearing sends confusing signals to the market.