Liquidity continues to be tight in the money market with banks raising a record Rs 1.6 lakh crore from the Reserve Bank of India (RBI) under the liquidity adjustment facility (LAF), a window provided to banks to raise money. This has also resulted in private companies staying away from the debt market.

“The RBI’s relaxation in SLR (statutory liquidity reduction) will not help alleviate the current fund crunch as the average bank holding in government securities is 29 per cent. So the one percentage permanent reduction in SLR from 25 per cent to 24 per cent will exercise only in further rise of banks’ lending rates and credit demand. Otherwise, it does not make sense for the banks to offload their government securities at 8 per cent,” GA Tadas, chief executive officer and managing director of IDBI Gilts, said.

Private companies have also stayed away from the corporate debt market as banks were not subscribing to the commercial papers even though the returns on these investments were high at 9.5 per cent to 10 per cent.

“Today, small amounts of debt were raised with companies like Renuka Sugars mopping up about Rs 25 crore at 10 per cent for three years. Besides this, the market has not seen any activity for nearly a fortnight. Many companies may be raising money overseas at cheaper rates,” said a public sector bank official.

Domestic credit has been replaced by external commercial borrowings (ECBs) by companies. In October, mid-sized companies applied with the RBI to raise about $799.69 million with a large portion of it to be used for rupee expenditure, modernisation and import of capital goods, according to the monthly data released by the apex bank.

A foreign banker, who did not want to be quoted, said companies depend lot more on ECBs as they provide a cheaper source of funding.

A lot of money, close to Rs 63,000 crore, was taken out of the system for the 3G licences and the government has about Rs 85,000 crore lying un-spend with the RBI, creating a fund crunch.