Roadmap Set For Basel-II

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: The Annual Policy against the backdrop of a government change, contains welcome measures to strengthen prudential norms and develop the institutional infrastructure. Importantly, its draws a roadmap to help Indian banks implement the new capital accord under Basel-II. RBI expects the new capital accord to be finalised by the end of June 2004. With this timeline in mind, RBI has asked banks to prepare their internal roadmaps for migration to Basel-II by December end; thereafter progress under this will be reviewed quarterly.

In line with the proposals under Basel-II, banks would be required to maintain capital charge for market risk in a two-phased manner, beginning March 2005 with their trading portfolios.

Banks need to strengthen their risk management systems to manage consumer credit growth in recent years. The regulator’s emphasis on the need to pay attention to the “quality and pace” of growth in consumer credit is appropriate and timely.

The policy contains specific measures to improve the flow of credit to agriculture and small and medium scale (SME) segments.

Importantly securitised agricultural loans will now qualify as priority sector lending, while the scope of infrastructure lending has been expanded to include specified facilities for the agri-processing sector.

To support infrastructure lending by banks, RBI will now permit banks to issue long-term bonds, which are not subordinate in nature, up to the extent of their residual exposure.

I see this as imparting greater depth to the debt markets; increased infrastructure lending by banks would also fill the void created by the weakening development financial institutions.

Through this policy RBI has affirmed its current “soft and flexible” policy stance with respect to interest rates.

This is in line with its expectations of continuation of good economic performance in 2004-05 and taking into account prospects for credit growth.

Although RBI does not expect the price situation in 2004-05 to cause concern to macro stability, the stance of monetary policy will depend on the implications of global developments and inflationary expectations.