Public sector financial institutions, which were recently given the approval to raise funds abroad, may not be able to utilize these funds completely, the finance ministry has said.

According to a news report in Mint, the finance ministry is concerned that the move, which was announced in August to finance current account deficit (CAD) and prevent the rupee from falling further, may boomerang. The ministry is worried that the high-cost funds raised by state-run financial companies through sale of quasi-sovereign bonds in foreign markets might remain unutilised. It has thus, decided to take some precautionary measures as India infrastructure finance company limited (IIFCL) plans to raise funds abroad.

The ministry has asked the Reserve Bank of India (RBI) to slash the cash reserve ratio (portion of deposits banks need to keep with the RBI) and statutory liquidity ratio (amount of ready cash and near cash balance which banks are required to keep with themselves) so that banks could make use of the IIFCL’s refinance window. At present, the apex bank has fixed the CRR at 4 percent and SLR at 23 percent.

"Once IIFCL raises the funds, it has to deploy (them). How will it use these funds? It will need banks to use these funds through the refinance window," a government official said.

"But banks will not be interested to use these funds if they have to set aside funds to meet the CRR and SLR requirements. Investing funds in government securities will give banks a lower interest rate compared to the return that they would have got by onward lending," the official added.

The ministry’s demand, the official said, has been made along the lines of the relaxation given to banks which avail refinance from small industries development bank of India (Sidbi) and the national bank for agriculture and rural development (Nabard). The amount of refinance from these two financial institutions does not add up to the banks’ liabilities and it is not taken into account while banks set aside the CRR and SLR amounts. This is why banks consider refinance an attractive option.

In August, finance minister P Chidambaram had announced that state-run financial institutions will be allowed to sell quasi-sovereign bonds so as to bring in capital flows that can be used to finance the country’s CAD. Recently, the RBI had announced that the CAD in the first quarter of the current fiscal stood at 4.9 percent.

Indian railway finance corporation limited (IRFCL), power finance corporation limited and IIFCL have been asked to raise $4 billion from the overseas markets.