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Call exposure for banks may be capped

BS Banking Bureau

The Reserve Bank of India is expected to announce a cap on call market borrowings of commercial banks in the Credit Policy. A bank's exposure to the overnight call money market is likely to be linked to its net worth.

"It can be equal to its net worth. There is a possibility that the RBI may link it to a bank's deposit portfolio. For instance, it may stipulate that the exposure to call money cannot be more than a certain percentage of the banks' deposit liabilities," said a banker.

The access of primary dealers to the overnight call market is also likely to be restricted. Primary dealers will finally be directed to end their dependence on the call market once the repo market develops.

This is significant against the backdrop of the huge turnover in the call money market in recent times, indicating the growing dependence of banks and primary dealers on the overnight market for short-term funds.

"In the current financial year, some private and foreign banks have been borrowing heavily from the call market to build assets. But such dependence on call money can land a bank in a serious crisis and hence the need for brakes," a banker said.

Moreover, some observers feel excessive dependence on the call money market works as an obstacle to the development of the term money market. Both for banks and primary dealers, excessive dependence on call borrowings can create serious asset-liability mismatches.

Banks borrow from the call money market to build assets because overnight call money rates have generally ranged between 6 per cent and 7 per cent and the market has not been volatile. The repo rate, pegged at 6 per cent, acts as the floor for call rates.

For primary dealers, the call money market has been the main source of funding. Bankers expect while the central bank may check primary dealers' access to the call money market, steps for the development of the repo market may be taken so that it becomes an alternative source of short-term funding.

"If a bank or a primary dealer cannot get finance from the overnight market, it has to take the repo route. This will bring liquidity to the repo market and increase the number of transactions," a banker said.

Some of the new private and foreign banks are using money borrowed from the call money market to trade in government securities.

"In the government securities market, a bank can earn 20 per cent by buying and selling 10-year paper. So a market-savvy bank can arbitrage between call money and gilts by borrowing from the call market and using the proceeds in the government securities market," a dealer at a private bank said.

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