"The forthcoming credit policy should be a roadmap for implementing the second generation of banking reforms. There is no case for reducing the cash reserve ratio (CRR) since there is enough liquidity in the system to deal with any surge in credit off-take," averred Reserve Bank advisor MS Verma.

Speaking to The Financial Express, most bankers felt that RBI need not time its decisions on changes in the bank rate or CRR to the credit policy, but take appropriate measures as the situation warrants. However, a section felt that a slight reduction in key interest rates by the central bank would aid pick-up in demand for credit from the industry, which expects economic performance of the country to improve during the second half.

"The credit policy would address key macro-economic issues and my feeling is that a CRR cut will not form part of the policy. Such a measure can take place anytime and may not necessarily be announced in the credit policy. The general emphasis of the policy will be on what direction the banking system would take in the days to come," said Bank of Baroda's deputy general manager K C Chakraborty.

The second round of reforms envisages implementation of the Narsimham committee report which recommends that the capital adequacy ratio (CAR) requirements take into account market risks in addition to credit risks, making asset classification norms more stringent, addressing the issue of convergence of activities between banks and financial institutions (FIs) and moving towards international norms with regard to prudential norms and disclosure requirements. The recommendations of the committee on financial system (CFS) set-up in 1991 set out the agenda for financial sector reforms. Suggestions of that panel have been implemented to a large extent.

According to Verma, norms related to CAR, reviewed globally by the Board for International Settlements (BIS) may also be looked at.

Industry circles have demanded a cut in CRR on the reasoning that this move is necessary for facilitating the growth of the real sector, expected to show improved performance during the second half.

"Liquidity is not an issue at present. The issue before the announcement of the credit policy is that a section of industry wants lower interest rates," stated Chakraborty.

The central bank had initiated deregulation of the lending rates in the April credit policy by giving banks the freedom to fix lending rates for maturities corresponding to the deposit rates.

"Any decision on slashing interest rates cannot be taken in isolation. Paring key rates by RBI leads banks to cut their prime lending rate (PLR), which affects their margins. In an ideal situation, such a measure should not occur unless there is a corresponding reduction in deposit rates. But, banks are not in a position to cut interest on deposits unless rates on schemes like employees provident fund and PPF are also reduced," added Chakraborty.

IDBI Bank's managing director Deepak Mukherjee feels that though infusing liquidity is not an issue at the present juncture, the avowed policy of RBI remains to reduce CRR and statutory liquidity ratio to the minimum levels.

"There is a general feeling in the industry that an interest rate cut may happen. The RBI has moved in this direction by taking measures to progressively reduce interest rates," Mukherjee said adding that the central bank may take such a step if it senses signs of recovery and feels that liquidity in the banking system is tight.

Indusind Bank's managing director K R Maheshwari, while advocating a CRR cut to infuse liquidity for aiding banks to meet the possible rise in credit-offtake stated that the banks may reduce their PLRs only when the RBI changes the bank rate.

According to Maheshwari, private banks strongly favour deregulation of the saving bank rate. He said that it makes little sense to regulate this rate currently at 4.5 per cent, when all other deposit rates have been deregulated, providing banks full freedom to fix interest rates.

Maheshwari further said that the export credit refinance by RBI to commercial banks should not be linked to a base period. "The RBI should changes norms to allow refinancing the entire export credit of banks," opined Maheshwari.

On the structural reforms likely to be included in the credit policy, bankers feel that the October'98 policy announcements about bringing changes in the capital adequacy requirements, income recognition and asset classification norms may materialise fully in this policy.

Says Maheshwari: "The coming credit policy may spell out the broad time-frame for giving a definate shape to the October'98 policy measures. These include reducing the period of classifying an asset as sub-standard to 18 months from the current 24 months and asking banks to start providing a 2.5 per cent weight to investments in government securities".

The RBI had stated in last year's credit policy that banks provide 2.5 per cent risk weight on gilts by March, 2000 and lower the period for classification of asset as sub-standard to 18 months by March 2000 from the current 24 months. "The long-term goal of RBI is to further reduce this time-frame to 12 months and some announcement may be made in the credit policy," said a banker.