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April 16, 1999


Industry urges RBI to cut CRR, bank rate and SLR

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The Federation of Indian Chambers of Commerce and Industry, the Confederation of Indian Industry and the Indian Merchants' Chamber have urged the Reserve Bank of India to reduce bank rate, cash reserve ratio and statutory liquidity ratio in the forthcoming Credit Policy 1999-2000.

Such a move would improve market sentiments. The CRR at ten per cent is higher than the global average of three per cent. The medium-term objective should be to reduce the CRR to international levels. This would improve the profitability of the banks while releasing funds for the commercial sector, the FICCI said in a letter to the RBI. ''At the present juncture, a reduction in the CRR by one per cent in two phases should be considered.''

The CII has called for a one per cent cut in bank rate and a 2.5 per cent cut in CRR. The government should move towards a three per cent CRR in the long run, as recommended by the Tarapore Committee, it said.

The chamber also called for an increase in the capital adequacy ratio from eight per cent to 12 per cent in four years, at the rate of one per cent a year, and in the credit-deposit ratio from 50 per cent to 55 per cent.

Regarding SLR, the FICCI opined that there is a scope for reducing two and a half per cent so as to peg it at 22.5 per cent. The present SLR requirement of 25 per cent is high by global standards.

Although the SLR securities now bear market-related interest rates and do not strain the banks' profitability, they do represent a pre-emption of funds by the public sector. Phasing out of SLR requirements would require a change in Section 24 in the Banking Regulation Act of 1949.

On reduction in the bank rate, it said that the recent reduction in the bank rate from ten per cent to nine per cent was a welcome step. But it still remains much higher than the rates prevailing in the international market. In this regard, the FICCI suggested that a further reduction by one per cent is required to improve the profitability of the various productive sectors.

The group approach to lending adopted by banks and financial institutions is self-defeating and should be abolished. All corporate entities have a limited liability and all shareholders have equal responsibility. If a company fails, it is a part of normal business risk and should be accepted as such. This approach to lending, a hangover of the licence/quota system, adversely affects the process of making management professional.

The chamber has also suggested that the credit facility should be extended to distribution/trade sector. Presently, no institutional finance is available for distribution/ trade sectors for financing its fixed assets needs like acquiring of premises / godowns and payment of dealership deposits.

Establishment of short-term benchmark rate, the development of market in instruments like interest rate futures and interest rate swaps is dependent on the development of a short-term inter-bank money market. The removal of CRR requirement on inter-bank borrowings is necessary for the development of such a market.

It suggested that lending by banks to infrastructure projects should be classified as a priority sector and a separate limit should be earmarked. The infrastructure sector would require substantial funding over the next decade. While banks are gradually building up expertise in this area, the earmarking of a certain portion towards infrastructure sector would give an immediate impetus to infrastructure financing.

Access of long-term funds to infrastructure sector, SLR requirement of non-banking finance companies, extending time limit of pre-shipment and post-shipment credit at the reduced rates, SLR requirement of NBFCs, allowing banks to provide funding for mergers and acquisitions, streamlining credit delivery also needs to be looked into, the FICCI said.


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