India eases cash rules for banks to soothe credit crunch

The central bank has eased the liquidity coverage ratio norms of banks.

Reuters reports that Indian lenders will be able to access more liquidity after the central bank relaxed mandatory cash requirement rules effective October 1 amidst growing fears of a credit crunch.

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The Reserve Bank of India (RBI) eased the liquidity coverage ratio norms by allowing banks to include up to two percentage points more of government securities in their statutory liquidity ratio reserves.

The move comes as regulators attempt to calm the rattled market after a series of debt defaults by Infrastructure Leasing & Financial Services which have dampened investor sentiment, further aggravated by a tumbling rupee that has gained the distinction as Asia’s worst performing currency. "This...will help improve the distribution of liquidity in the financial system as a whole," the RBI said in a circular.

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Indian banks currently have to buy government bonds worth about 19.5% of their deposits as a part of their statutory liquidity ratio (SLR).

Once the reforms kick into effect, banks can carve out 15% of their deposits from their SLR compared to 13% earlier, which will relax demand for funds from banks to buy government bonds to that extent.

Here’s more from Reuters: