Wednesday , February 20 2019

Finance Ministry to Re-Consider on Surplus Cash Absorption by Banks

Finance Ministry had called Bankers into a meeting to address the absorption of surplus cash in the banking system


According to a leading news agency, the Finance Ministry, on Friday had called the bankers for a meeting to discuss on the surplus cash in Banking System. And it was decided that the Banks can absorb the surplus cash.

The Ministry discussed on draining the surplus cash at metrics lower than the repo rate, without the need for any collateral, by implementing a new framework called a “standing deposit facility”.

Earlier, such a proposal was also brought up by the Reserve Bank of India.

After the demonetisation drive, the banks have witnessed a huge surplus in cash deposits.

The new framework named as “standing deposit facility”, would drain surplus cash at a rate lower than the repo rate.

The Reserve Bank of India would have the authority to keep this surplus cash and it revives a proposal issued by the central bank in 2014 as another way to drain funds.
This plan would have the potential to resolve the issued faced by the regulators like it can handle the surge in cash deposits since the ban of higher-value notes in November.

Those cash deposits have resulted in liquidity rising to around Rs 4 trillion ($61.13 billion) in March from 2 trillion in January.

Such a situation could lead to inflation at a time when the RBI is seeking to prevent rising prices by changing its policy stance to “neutral” from “accommodative.”

This proposal can encourage banks to lower their lending rates, which in India track short-term money market rates.

The Banks would need to reconsider calculating its lending rates and incorporate the rate offered by the RBI.

Furthermore,  RBI has removed funds through various facilities, including mandating banks to park excess certain types of cash and deposits with the central bank as well as through repos and reverse repos based on market rates.

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