RBI Sets Up Currency Swaps For Banks Needing Dollar Funding
The Reserve Bank of India (RBI) last week said it will provide foreign exchange liquidity to foreign branches and subsidiaries of Indian banks through currency swaps.The Indian central bank said that such a measure would ease pressure on Indian banks managing short term fund requirements for their overseas business’s that have been squeezed by the global credit crisis.
Banks can borrow Rupees from the RBI via the repurchase auctions that the central bank conducts daily to fund the currency swaps. The RBI is also considering easing on a case by case basis banks’ Statutory Liquidity Ratio (SLR) the proportion of deposits banks must hold in government debt to free up cash to fund such currency swaps.
The currency swaps the RBI will make available have a maximum maturity of three months, and will be priced using domestic and international money market rates, using the Dollar-Rupee reference rate published by the central bank daily.
The RBI in its statement said that central banks globally in their response to the global credit crisis and subsequent virtual freeze in interbank lending, have taken collective action to ease liquidity. Central banks have used measures such as inter-central bank swap lines, collateralized lending and foreign currency swaps to subdue the impact of turmoil.
The move according to a State Bank of India (SBI) spokesperson is designed so that those banks not able to obtain credit from foreign lenders on the short term interbank money market would now be able to tap the RBI, which should have the effect of allowing Indian banks with an overseas presence to tide over the liquidity crisis. The spokesperson added that SBI does not face such problems because it apparently has a surplus of Dollars.
The move is at best a temporary measure, three month currency swaps mean that after the term of the agreement expires then banks will have to find an alternative source of funding. If they cannot do this then ultimately they will have to reduce the overall size of their dollar loan portfolio.
The statement made by the central bank made no mention of how much would be made available to banks under terms of the agreement. The RBI is likely to assess this on a case by case basis and any limit linked to the size of their overseas loan book.
Other than SBI, Indian banks with a sizeable overseas presence include ICICI Bank, Bank of Baroda, Indian Overseas Bank, Bank of India and Axis Bank. Indian banks have been adapting their business strategy to the rapidly changing business environment, trying to protect themselves from downside risk. In some cases banks have even bought dollars on the domestic Indian market and repatriated them overseas to meet their obligations.
In their response to the move by the central bank, the country’s two largest lenders SBI, and ICICI Bank, both said they did not need to borrow from the RBI in order to meet their overseas requirements. Both banks issued statements at the beginning of the week saying they have excess liquidity in their overseas operations.
SBI Chairman OP Bhatt was quoted by the Business Standard as saying “As far as forex liquidity is concerned, we are positive. We are actually placing money overseas. If you look at our asset-liability match, as far as our dollar balance sheet is concerned, we are quite well matched in the medium- and long-term,”
ICICI Bank echoed the sentiment and Joint Managing Director and Chief Financial Officer Chanda Kochhar said, “The bank’s overseas branches and subsidiaries have robust, excess liquidity and so we have not borrowed (from RBI).”
The bankers were speaking on the sidelines of a banking seminar, organised by the Federation of Indian Chambers of Commerce And Industry (Ficci) and the Indian Banks’ Association (IBA).
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