RBI Gives Big Push For Credit Delivery, Softer Interest Rates

Mumbai, April 29: | Updated: Apr 30 2002, 05:30am hrs
Reserve Bank of India Governor Bimal Jalan on Monday unveiled the monetary and credit policy for 2002-03 which aimed primarily at facilitating better credit delivery and moving forward with structural reforms. Dr Jalan made it clear that this policy statement needed to be viewed against the comfortable macro-economic scenario - very healthy foreign exchange reserves, low inflation and sufficient liquidity in the system.

On the macro-economic front, RBI said the growth rate of the real gross domestic product in 2002-03 is pegged at 6-6.5 per cent with the assumed rate of inflation slightly lower than 4 per cent. Non-food credit adjusted for investments is projected to grow by 15-15.5 per cent.

RBI Governor Bimal Jalan (L) and deputy governor YV Reddy announcing the credit and monetary policy for 2002-03 in Mumbai on Monday
The Governor also indicated that the central bank expects to conduct debt management without serious pressure on overall liquidity and interest rates. Consequently, it announced a further reduction of 50 basis points in cash reserve ratio to 5 per cent effective from June 15, in line with the central banks stated objective of moving towards the minimum CRR level of 3 per cent. The reduction will release Rs 5,000 crore.

The policy also made it clear that the bank rate may be cut by 50 bps depending on monetary developments and pitching for banks to initiate measures to make the interest rate structure more flexible and reflective of the underlying inflationary situation. The savings deposit rate has been left untouched at 4 per cent.

Dr Jalan said RBI was all for transparency in the interest rate scenario, so that customers at any point know whats on offer. Banks have been asked to provide information on deposit rates for various maturities and the effective annualised return to the depositor. Further, banks are also to do likewise on the maximum and minimum interest rates charged to their borrowers. Both moves are to be put in the public domain.

Dr Jalan told the press, there are no surprises in this policy. The background is the extremely comfortable liquidity situation.

Later, in an interview to the FE, he said, the emphasis is also on giving confidence to the market that the soft interest rate regime would remain. And if you see the nuances, this is much more direct than was the case a year ago.

On the CRR front, while it is proposed to reduce it to 5 per cent from the fortnight beginning June 15, RBI said it may, however, advance the effective date of reduction in case there is an unexpected change in liquidity conditions. On the bank rate, Dr Jalan pointed out that there is substantial excess liquidity in the system, which is reflected in the repo amounts received by RBI, lower yields on fixed income securities and reduction in deposits and lending rates. Under these circumstances, on balance, it is considered desirable to leave the bank rate unchanged, he said.

It was pointed out that the matter will be under constant review and in case the overall liquidity and credit situation warrants and inflation continues to be low, a 50 bps bank rate cut will be considered by the RBI as and when necessary. Dr Jalan said this would also set at rest any speculation on the possibility of a rate cut.

On the deposits side, RBI has pushed for an important change a flexible rate system for all new deposits, with reset at six-monthly intervals. A fixed rate option is also to be made available by banks to depositors. For instance, banks may offer longer term deposits with six-monthly resets and at the same time offer a fixed rate for similar maturity, the interest rate on which may be higher and lower depending on the period of deposits and the banks perception of inflation as well as interest-rate outlook over the longer period. RBI has also exhorted banks to encourage depositors to convert their long-term fixed rate deposits into variable rate deposits. By way of incentive, the RBI has said that banks may consider paying the depositors at the contracted rate for the period the deposit has already run and wave the penal for premature withdrawal and the same deposit is renewed at a variable rate.

Another important move by the central bank has been on the lending rate side. The RBI feels the current mark-up over prime lending rates (PLR) of banks are high. It feels in the present interest rate environment it is not reasonable to keep very high spreads over PLR. Banks now will have to declare the maximum spread over PLR to the public along with the announcement of the PLR.

The central bank has moved to improve credit delivery by way of a slew of initiatives. These include increase in limits for distribution of inputs for allied activities under priority sector to Rs 25 lakh from the present Rs 15 lakh limit. Similar relaxations have also been extended to the small scale sector and housing finance on the securitisation side.

On the structural reforms on the money market side, commercial banks lending in the overnight and notice money market is not to exceed 25 per cent of their own funds as at end March of the previous fiscal. Further, daily borrowings in this market is not to exceed 100 per cent of their own funds or 2 per cent of aggregate deposits as at the end of the previous fiscal, whichever is higher. More importantly, existing borrowers and lenders are to unwind their positions in excess of these limits by August. The borrowing limit would also apply to state cooperative banks and district central cooperative banks. By way of relaxation, RBI will consider temporary access to this market if banks are to face mismatches, on request.

Critically though, RBI has categorically said that increased access over stipulated norms may be permitted for longer periods for banks with fully functional asset-liability management systems satisfactory to RBI. It has also constituted a working group for fixing limits for primary dealers in money markets and to suggest a roadmap for their phase-out. The report is to be submitted by June 30.

RBI also decided that banks need to have a higher investment fluctuation reserve of 10 per cent which will be applicable only to two categories held for trading and available for sale.