"Talks have been going on with the Reserve Bank on the fixing of new refinance limits. We have told them that the dicretionary refinance limit instead of solving problems for us, has complicated problems", a source in a PD said.

The RBI provides two types of refinance to PDs--liquidity support to all PDs based on the bidding commitment made by them at the beginning of the year under which the PDs avail of the liquidity support upto 75-80 per cent of the total liquidity support at any give time and second--the discretionary refinance in which further support is made available to PDs under tight liquidity conditions to ease the pressure on the interest rates.

Sources added that the central bank might do away with the dicretionary refinance limit and replace it witha refinance facility which can be availed of at times of extreme difficulty. The central bank can fix a penal rate linked to the bank rate. "If the central bank fixes the rate at 200-300 basis points above bank rate it will automatically discourage PDs to avail refinance through this route", a source said.

PDs said that if the RBI does away with the discretionary refinance limit it will be good for them. "It was proving to be too cumbersome as availing the refinance is dependent on the whims of the central bank", a source said. The sources said that the introduction of the Liquidity Adjustment Facility (LAF) will not affect the refinance agreements between the RBI and the PDs.

According to sources, the RBI might cut refinance limits for PDs as those operating in the money market has gone up to ten in the current financial year. "There is a chance that they might cut the induvidual limits. Negotiations are on and nothing has been finalised", a source said.

The RBI had allowed liquidity support throughdiscretionary limits in December to PDs to ease the tight liquidity condition in the system.

Money market sources are of the view that under the existing tight money market conditions when the call rates are ruling 160 to 170 basis points above the RBI repo rate, PDs have no option but to knock RBI's door for refinance. "When the call rates are really high they have to take the discretionary limit otherwise they generally fund their operations through borrowings in the call money market", the source said.