Credit policy leaves CRR,
lending rates unchanged

MUMBAI, Oct 30 (PTI) — The Reserve Bank of India (RBI) today tightened operational norms for the Indian financial market to insulate it from East Asia like currency crises while underplaying the inflationary pressures by leaving "high money supply" in the economy untouched in its busy season credit policy.

Carrying forward the financial sector reforms through a phased implementation of stricter provisioning norms for banks and financial institutions as well as government securities to provide for additional risk coverage, the RBI left lending rates and cash reserve ratio (CRR) unchanged at 9 and 11 per cent respectively.

Announcing the policy, the RBI Governor, Dr Bimal Jalan, however, cautioned that the RBI would adopt tighter monetary stances if the inflation increases further or in case of external pressures and said the bank had deliberately avoided monetary and credit policy decisions in its mid-term review to make the event devoid of any hype.

Building up of expectations were affecting decision on advances by bankers nearly three-weeks before the bi-annual policy announcement, Dr Jalan said adding that banks were being asked to introduce effective risk management systems to cover risks in credit, market and operations and plan for a loan review mechanism for larger advances.

Capital support

Going beyond the recommendations of the Narasimham Committee, the RBI has stipulated an additional risk weight of 20 per cent on investments in government guaranteed securities of government undertakings in equal phases in 2001-2002 and 2002-2003.

Foreign exchange open positions of banks will carry 100 per cent risk weight with effect from March 31, 1999.

Dr Jalan said strengthening of capital adequacy and prudential norms could pose some immediate resource management problems.

Hence, the need to resolve soon the issue of capital support from the government and to enhance public sector bank’s ability to access the capital market to meet their capital requirements, which are central to ensuring the future financial viability of the banking sector, he emphasised.

No change in CRR, interest rates: Jalan

The RBI will, however, not hesitate to resort to further monetary tightening if inflationary pressures increase or if external developments so warrant, Jalan told Chief Executives of commercial banks while dwelling on the stance of monetary policy for October 1998-March 1999.

The RBI will continue to manage liquidity through open market operations and repo operations.

The conflicting considerations, viz. The need to reduce monetary expansion while at the same time nurturing real growth, starkly illustrate the monetary policy dilemma that the RBI faces at the present juncture, he said.

Money supply at 18.3 per cent on a year-to-year basis (excluding the Resurgent India Bonds (RIB) proceeds), attributable largely to growth in the banking sector’s credit to the Government, is too high in relation to the expected growth of the real sector of the economy.

Inflation

The rate of inflation of around 8 per cent is also higher than the initial projections

Although the price rise during the current financial year so far is largely concentrated on a few food items (e.G. Fruits, vegetables and edible oils), there is no denying the fact that such a high rate of monetary growth is inconsistent with the objective of maintenance of general price stability.

In this situation, a case can be made out for monetary tightening through measures such as increasing interest rates or a further increase in CRR.

However, it has to be recognised that industrial slowdown is still persisting and as far as possible nothing should be done to dampen emerging signs of incipient recovery in the real sector.

This view is reinforced by the fact that growth of bank credit to the commercial sector has not been a primary cause of expansion in money supply in the current year.

Jalan said hopefully, with the arrival of the new crop and the beginning of the period of seasonal decline in pris, the annual rate of inflation would decelerate in the next three-four months.

Fiscal deficit

Curtailing the fiscal deficit significantly over the next two to three years has now become a high national priority.

Beyond a point, it was simply not feasible for banks and financial institutions to increase the share of government securities in their overall asset portfolio without affecting their own viability and indeed the viability of the productive sectors of the economy, Jalan said in his mid-term review of monetary and credit policy for 1998-99.

Despite some additional pressures on the fiscal position, the government has announced its firm intention to contain the fiscal deficit and its borrowing requirements, to levels announced in the Budget for 1998-99.

Working group

The RBI will set up a working group of bankers to suggest measures for improving services to exporters to make available export credit "on line", including foreign currency loans.

The group will interact with exporters as well as bank officials dealing with export credit by visiting bank branches in some of the major exporting centres especially where small and medium size exporters are located.

On the basis of such interactions, the group will suggest changes designed to reduce repetitive documentation requirements and improve the quality and reduce cost of non-fund based services to exporters

Business dejected
Tribune News Service

NEW DELHI, Oct 30 — The business and industry today expressed disappointment over the busy season credit policy stating that the policy statement did not contain any measures to tackle the short term problems like demand recession and sluggish capital market.

The President of Federation of Indian Chambers of Commerce and Industry (FICCI), Mr Sudhir Jalan, said the policy did not address the short term problems like demand sluggishness.

"Industry naturally expected a few important short term measures which the RBI could have taken within the given parameters, such as steps for boosting consumer industry and demand, measures for stimulating capital market, doing away with the group lending concept, easy steps for bill discounting etc. This measures are critical for an early turn-around of the economy which is showing signs of bottoming out", Mr Jalan said.

Mr Jalan said the undertones in the mid term review policy seems to be a monetarist response to an undue fear inflation triggered off by higher growth M3 and increase in inflation rate in the recent days.

The right approach should have been a combination of fiscal and monetary measures which could have balanced the money supply and at the same time given a critical push to the demand side.

Mr Jalan said that the RBI has rightly reduced the export credit to 9 per cent per annum for pre shipment and post shipment credit to the exporters in August 1998 which was effective till March 1999.

The PHD Chamber of Commerce and Industry (PHDCCI) said that the RBI has not indicated any positive and supportive steps to boost demand generation and investment as also to ease lending rates.

In view of the likely high fiscal deficit and government borrowings interest rates would move upwards leading to increased inflation. This would further lead to rise in lending rates which will effect the already slowed down industrial activity and subdued capital market, the Chamber said.

The PHDCCI, however, said changes suggested by the RBI regarding Capital Adequacy Ratio(CAR), income recognition, coverage of government approved securities with risk weightages provision norms for public sector undertakings and government paper are welcome initiatives with a view to strengthening the financial system .

But these measures should not directly or indirectly effect the offtake of credit by trade and industry from the banking system,the Chamber cautioned.

The president of Confederation of Indian Industry (CII), Mr Rajesh V Shah, said the Reserve bank should have given a signal to reduce the rate of interest through the credit policy.

The CII had strongly advocated the reduction of the cash reserve ratio (CRR) to release the much needed funds for productive purposes. The RBI has chosen to maintain the CRR at 11 per cent which would adversely affect the industry’s position, Mr Shah said.