A Reddy-mix For The Future

Written by Sourav Majumdar | Updated: Nov 5 2003, 05:30am hrs
You cant touch this! This line from an MC Hammer song is probably what Reserve Bank of India (RBI) governor Yaga Venugopal Reddy had in mind when he drew up his mid-term review of the monetary and credit policy. And he didnt touch Bimal Jalans April policy at all. By not doing so, Dr Reddy has stayed away from the temptation of announcing his arrival at the top job at the countrys central bank, or making changes for the sake of making them. Dr Jalans policy has delivered, and delivered more than it promised. So theres no need for any tinkering, the governor said while explaining why key rates were left untouched.

If the economy has performed well since April and credit offtake has been moving up since August, where was the need to change either the Bank Rate or the cash reserve ratio And, as Dr Reddy articulated, liquidity can come by way of capital inflows as well. Against this background, his first policy has stayed away from the Big Bang approach.

Look deeper and you will find several pointers to what Dr Reddy feels is the road ahead, and how he intends to take the countrys monetary and financial system through that journey. This, in fact, forms the heart of the mid-term review statement. Crucial areas like financial regulation, credit delivery, customer service in banks, public service by RBI itself, monitoring of financial intermediaries beyond banks and the future of development financial institutions have all been addressed in some detail. This, the governor says, is his way of creating the ground for second generation reform.

Obviously concerned about the lack of adequate credit delivery in sectors like agriculture and small industries, Dr Reddys contextual response to this crisis is to go deeper into the issue. An advisory committee is being appointed to look into the flow of credit to agriculture and related services. The Committee would, inter alia, look into the role of the National Bank for Agriculture and Rural Development (Nabard) in the development of the sector, the present structure and deployment of rural infrastructure development fund (RIDF), role of RRBs and incentive and attitudinal aspects of credit delivery. It would suggest appropriate changes in the institutional and procedural arrangements for the smooth flow of credit to agriculture, the policy statement says.

Dr Reddy feels that the coming days would see a wider and deeper interaction of the masses with the banking system, and banks need to prepare for that from now. He says some of these issues arent fashionable, but need to be addressed anyway. Consequently, banks have also been advised to set up ad hoc committees on procedures and performance audit on customer service in banks. But RBI is also realistic. Sample this: ...Further, the committees would look into regulations and procedures prescribed by the RBI that impinge on customer service of banks and make suitable recommendations....

A major element is the step towards better financial regulation. This would widen the scope of discussions on regulation of banks and non-banking financial entities on an ongoing basis. Though this is to be essentially a technical committee, wider issues pertaining to regulation by RBI could even be taken up by it.

Dr Reddys policy has also taken a major step forward in monitoring of what RBI now calls systemically important financial intermediaries (SIFIs). The governor believes major financial players are fast moving into becoming corporates, riding on various segments of the financial world. Hence, there is urgent need for better, and more transparent, reporting by and monitoring of these entities. Better coordination between regulators will be the key to this initiative. RBI, together with SEBI and Insurance Regulatory and Development Authority, will set up the monitoring system on matters common to all three regulators, encompassing also the reporting of intra-group transactions by SIFIs and exchange of relevant information between the three.

This policy eggs you on to look beyond mere rate cuts and immediate issues and is more of a roadmap for the next stage of financial reform. With a five-year tenure ahead of him, and the macroeconomic situation in RBIs favour at the moment, its time to plan for the future. Thats exactly what Dr Reddy has done. The Hammer song would apply equally to the Reddy policy.