The RBI Governor’s statement on the October Credit policy seems to be largely on expected lines. While the industry, in general, will welcome the cut in CRR by 100 basis points in two phases, the actual benefit to industry will depend on the reduction in PLR by the banking system.

It is true that lendable resources in the system will go up. But the PLR depends on several other factors. The banks’ own cost of funds and their administrative expenses do not give an indication that the banks would be able to cut PLR below the current levels (12 per cent for most of the large nationalised banks).

Moreover, the competitive borrowers in the system such as fixed income mutual funds, PPF and other Government schemes such as NSC, Kisan Vikas Patra, etc, will also act as a deterrent to a reduction in PLR.

A major problem with the banking system in India is the lop-sided flow of credit. What I mean is that while the top few corporates would have too many bankers chasing them, a large number of medium and small corporates, which play an important role in the national economy are starved of funds.

The second problem is speed of decision-making in banking industry. Even a sound credit decision can take between three and six months in nationalised banks whereas the comparable period internationally, would be maximum of three weeks. If reforms in banking sector are to succeed, the banking industry will have to address the above issues.

Another important measure, which will help industry directly is withdrawal of surcharge on import finance. At the first place, it was an illogical measure to be introduced.

Moreover, there was ambiguity in the implementation of this measure. For instance, even if a corporate was funding imports out of its internal accruals, the banks were charging import finance surcharge on the plea that the same is leviable if a corporate has any borrowing from the banking system.

There was a lot of dispute between corporates and banks on this issue and withdrawal of this surcharge will be welcomed by the industry.

The freedom given to the banks on interest to be charged on bills discounting will help the banks in getting better returns as the funds will move to this product from commercial paper. Sound corporates would also be able to take advantage as the funds may be available to them under bill discounting at below 11 per cent.

In fact, some of the banks were already offering this facility to their clients by adjusting their short-term PLR. This is expected to bridge the gap between commercial paper rates and rates on bill discounting.

Exporters will be disappointed since the credit policy does not offer them any benefit.

The two-year old announcement of RBI to bring down the export credit cost to around 6 per cent was never implemented and exporters continue to pay interest of 10 per cent, which is among the highest, internationally.