The reduction in CRR by 50 basis points, and the assurance to reduce the bank rate in case it is required is positive for the system, as it indicates the maintenance of a soft and stable interest rate regime, besides providing a cushion to the earnings of banks. This is important as an economic revival is expected in this year.
Exports, housing and the priority sector are the three main beneficiaries in this Policy. Interest rates on export credit could be deregulated soon, which combined with the reduction in export credit in foreign currency to Libor plus 0.75% points will assist the growth in export credit and hence, exports.
The housing sector is to benefit directly from the alignment of the risk weight of 50% to residential mortgages from 100% as per global best practices. The thrust on priority sector credit, including small-scale sector, and focus on micro-credit would improve the flow of credit to these sectors. There are some interesting challenges for banks in this Policy. They will have to hone their asset-liability management (ALM) skills, as they will now be subjected to caps placed on call market borrowing and lending. The revision in interest rates on FCNR(B) deposits will benefit them and they will also, additionally, have more freedom to deploy these funds in longer-term investments. Competition will increase in the market, as banks will strive to increase their deposits with the introduction of floating rate deposits, which will offer an attractive option to customers.
Further, on the regulatory front, prudential norms have been tightened in line with the global best practices. Asset classification norms are going to get more stringent as an asset will be classified as doubtful if it remains in the substandard category for 12 months, instead of 18 months with effect from March 2005.
Banks need to start planning such classification from now on. Also banks will have to move over to charging of interest on bank loans at monthly rests except for agricultural advances. Further, the investment fluctuation reserve can be built based on only the trading and sale categories of investments and not the hold-to-maturity (HTM) category. These measures will help to strengthen the banking system. On the whole the Policy has sent very positive impulses in the system, while steadily moving it towards global standards, which is a challenge to banks.