The RBI sale window will be active for now. The purchase window will open up as and when corporates decide to borrow

I am delighted that the RBI Governor has cut CRR but has not reduced the bank rate. This provides relief to banks in terms of profitability. Back of the envelope calculations show a benefit of Rs 300 crore for the industry. By not reducing the bank rate, banks are now enabled to continue without reducing lending rates and consequently the deposit rates, thus fending off the competition from MFs.

The Governor has now honed his liquidity tools finely and is able to intervene in the market through purchase and sale windows ensuring that the liquidity is maintained at reasonable levels. This would ensure that liquidity would be released as and when credit demand moves up. I would expect RBI’s sale window to be active for sometime now and the purchase window to open up as and when corporates decide to borrow.

The withdrawal on CRR to incremental FCNR(B) will further add Rs 1,060 crore, bringing total release of Rs 8,060 crore in all. With these measures, the stance of RBI will result in both reasonable liquidity and stable interest rates at the medium- and long-end. The short-term rates, however, are likely to soften from the current levels. The yield curve, therefore, should be steeper with the shorter end dipping.

The base date for calculation of CRR has been moved back by 2 weeks making it a uniform base for CRR and SLR. This simplifies the procedures, but the significant benefit, especially to banks with large networks, is that they will be able to maintain cash with RBI only to the extent required because of the availability of accurate data. This should result in efficient management of cash and consequent benefit in terms of profitability.

The raising of minimum maturity of FCNR(B) deposits will result in a structural change in the maturity profile in the external liabilities of the country leading to better stability. As far as the banks’ profitability is concerned, the higher cost is likely to be compensated by higher yield on the investments.

On the lending front, the PLR prescription has been modified with respect to certain cases where the rate charged was required to be below PLR, such as cases where loans were to be routed through credit societies or through other intermediary agencies. Similarly, the PLR prescription will not be applicable where the same is clearly linked to the refinance rates or are linked to the deposit rates. The lending rate on discounted bills is delinked from the PLR as these bills are rediscounted at market-related rates and consequently, these rates will be dictated by the prevailing money market rates. Some banks, however, may lose the arbitrage which they were earning by rediscounting the bills.

The RBI has taken a step forward in implementation of international norms on prudential limits. Banks were required to recognise the market risks in Government securities by providing 2.5 per cent risk weightage by March 2000. The logic of market risk has now been extended to non-SLR securities by prescribing a risk weight of 2.5 per cent. This is in addition to the credit risks weightage already applicable to non-SLR investments ranging between 20 and 100 per cent. Banks will now have to plan for higher capital adequacy on account of application of this weightage with effect from the year ending March 31, 2001.

Secondly, RBI has taken a stricter view to exposure risk and reduce the exposure limit applicable to individual borrowers from the present level of 25 per cent to 20 per cent of the banks’ capital funds. While the rule will be applicable from April 2000, wherever the existing exposure is more than 20 per cent, banks are required to reduce their exposure in the next 2 years. This would put pressure on the banks to shed the exposures in some of the major accounts. Considering the relative ease in shedding the exposure by way of debentures, banks may unload their holding of debentures/bonds.