RBI, micro-manager

RBI, micro-manager

The credit policy had said that banks would be allowed to guarantee loans provided by other banks for infrastructure projects. This is a welcome relaxation, enabling banks which may have the funds but not the expertise in evaluating such projects to participate in funding on the basis of guarantees provided by other banks. These banks would be the ones who had expertise in project appraisal, but lacked the balance sheet size to participate in funding. Or they could be foreign banks who had wide international experience in infrastructure projects and could provide the foreign exchange, but did not have the rupee funds needed. In short, guarantees by one financial institution to another helped marry the strengths of different lenders, for the benefit of all concerned. Yet the Reserve Bank has thought it fit to impose conditions which render the relaxation meaningless. The conditions are that a bank can issue a guarantee only if it takes a funding share in the project, and the amount of the guarantees will belimited to twice the funding share taken up by it. The rationale for this extraordinary decision is reportedly that the RBI does not believe in the separation of credit risk and funding. By that strange logic, all credit enhancement products would incur the wrath of the central bank.

It is unclear why the central bank feels called upon to interfere in the nitty-gritty of commercial banking. If a bank is comfortable with giving non-fund based facilities, such as a guarantee facility, to a company, there is no reason for the RBI to insist that it advance fund-based facilities as well. And if a bank feels more comfortable in lending if it has the additional guarantee of another bank, why should the RBI feel that it should be deprived of that comfort? Decisions such as these are best left to the judgment of banks.

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