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April 27, 2000




Bankers welcome RBI guidelines on insurance forays

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Leading bankers have welcomed "the first Credit and Monetary Policy of the New Millennium". The Reserve Bank of India Governor Dr Bimal Jalan has laid a strong foundation for India's future economic growth, they opined.

''The policy is an informative and educative paper for the banks,'' said G G Vaidya, chairman of the country's premier commercial bank, the State Bank of India.

Vaidya praised Jalan for presenting the policy aimed at the future. The policy also offers greater flexibility to the banks, he added.

Corporation Bank's Chairman H S Hugar said, ''It is not only the policy for a year, but for several years to come.'' Hugar said that the new routes offered by the RBI for the banks to enter the insurance field are encouraging.

Both Hugar and Vaidya re-affirmed their intentions to enter the insurance field. ''We are very happy with the policy guidelines and various measures the RBI has announced for the banks to enter into the insurance business,'' he said.

The bankers also welcomed the RBI's decision to reduce the requirement of a minimum of 85 per cent of the Cash Reserve Ratio balances to 65 per cent. The reduction in CRR balances will be effective from May 6. Bankers said that it will bring more liquidity into the market.

Welcoming the policy measures, K R Ramamoorthy, chairman, Vysya Bank, said that the policy is more like a backgrounder giving thrust to country's current and future economic perspectives.

He said that the Liquidity Adjustment Facility or LAF and guidelines for insurance were expected by bankers and both are welcome measures.

Asked about his bank's plans to enter the insurance sector, he said, "We are working on it and will announce very soon."

While unvieling the guidelines for insurance in the Credit Policy, the RBI has stated that banks having minimum networth of Rs 5 billion and satisfying other criteria in regard to capital adequacy and profitability, will be allowed to undertake insurance business through joint ventures on risk participation basis. The RBI will consider bank equity contribution in the joint venture upto 50 per cent and on a case-to-case basis.

The RBI has said that it will proceed with the implementation of a full-fledged LAF, replacing the Interim LAF. The new scheme will be introduced to ensure smooth transition, the RBI said.

Industry chambers welcome Jalan's initiatives

Trade and industry chambers today welcomed the RBI Monetary and Credit Policy terming it a growth-oriented statement which would carry forward the process of financial sector reforms as also the development of debt and money markets.

The policy, the chambers said, has rightly laid focus on building a strong financial architecture for India in tandem with the reforms process.

Confederation of Indian Industry or CII president Rahul Bajaj said the overall stance to effect changes based on a constant review of the economy, which has led to the CRR, bank rate, repo rate and savings deposits rate cut recently, was a pragmatic approach.

Measures such as easing of bank loan norms for small scale, tiny sectors, banks lending to NBFCs for on-lending to the agricultural sector as priority sector loans, focus on development of micro-credit by banks, strengthening of the technological infrastructure and the implementation of a full-fledged Liquidity Adjustment Facility are welcome, he added.

Commenting on the measures to ease credit delivery to various sectors, the CII president said enhancement of the loan limit to the tiny sector from Rs 100,000 to Rs 500,000 without any collateral, would promote credit flow to small borrowers. The increase in the composite loan limit from Rs 500,000 to Rs 1 million would also benefit the tiny sector.

The decision to reckon lending by banks to non-banking finance companies for on-lending to agriculture as priority sector lending would also incentivise and increase the flow of credit to the agricultural sector.

The action plan for upgrading the technological infrastructure by extending the coverage of the Indian Financial Network to a hundred-odd commercially important centres in the country would contribute to the development of a structured financial messaging network, he added.

G P Goenka, president of the Federation of Indian Chambers of Commerce and Industry or FICCI, said the non-food credit adjusted for investment in commercial papers, shares, debentures and bonds to public sector undertakings and private sector is projected to increase by around 16 per cent.

This growth in the commercial sector is the same that has been achieved in the last year. Given the fact that the RBI has projected that GDP will grow between 6.5 to 7 per cent during the current year as against 5.9 per cent the previous year, the demand for credit from the commercial sector would naturally be higher.

He welcomed the RBI decision to reduce the requirement of a minimum of 85 per cent for CRR balances to 65 per cent. This would give much greater flexibility to banks and improve their lendable resources.

Equally significant are the steps that have been taken to give more operational freedom to financial institutions and banks in terms of fixing interest rates for empowering them to raise more resources and relaxation in the issuance of Certificates of Deposits. This would induct a certain degree of dynamism into the fiscal and money market.

Goenka said in a growing economy, there has to be a focused attention on channelising lendable resources to manufacturing activities. With more resources locked up in government securities, the RBI has expressed its concern that this incongruity in the fiscal management would lead to distortions.

In terms of volume, the holdings above the statutory liquidity ratio by the banks amounted to Rs 850 billion which is higher than the last year's net borrowings. This means that the banking system holds over 34 per cent of lendable resources above the mandatory requirement of 25 per cent. As a result, there is a crowding out of lending to the productive sector.

He said this anomaly has to be addressed on an urgent basis. In this regard, he welcomed the RBI's emphasis on arriving at a national consensus on effective and time-bound programme on fiscal correction.

''The RBI has rightly cautioned the government on the adverse effect on the inadequacies of the funds to the commercial sector. This sector should not have any liquidity problem particularly at a time when industrial growth is picking up. There should not be any upward movement of lending rate,'' he added.

Goenka said the unexpected drought that has afflicted the country will have many adverse ramifications. The RBI has rightly focused on the follow-up measures that are being taken to contain the adverse impact of the drought. These measures have to be implemented in a given timeframe.

While welcoming the RBI decision to grant permission to non-banking finance companies to lend credit to the agriculture sector which is under the priority sector, Goenka felt that those NBFCs which are not accepting public deposits and whose basic activity is to fund their own group companies, should be taken out of the purview of the Section 45 (1) A to C of the RBI Act 1934 which stipulates rigorous process of registration and supervision.

Associated Chambers of Commerce and Industry of India or ASSOCHAM president Shekhar Bajaj welcomed the steps taken by the RBI to enhance the flow of credit to certain important sectors such as agriculture, micro credit institutions, small scale industries and housing.

The expeditious action providing loan to drought affected areas by re-schedulement/postponement of existing term loan installments is a step in the right direction, he said.

To make the banking sector competitive, the action plan for technology upgradation and increasing the scope of computerisation by bringing in more activities under its ambit is a forward-looking decision, he said.

Bajaj, however, felt that the RBI should have considered a further reduction in both CRR as well as bank rate. This could be done at an opportune time prior to busy season credit policy in order to boost the economic growth.

Due to favourable macro economic environment, the RBI was able to meet the large market borrowing requirement of government without too much stress and without causing upward pressure on interest rates.

It is time to devise a system in consultation with the Ministry of Finance for imposing a cap on government borrowings from market or the RBI.

Bajaj said unless this happens, the decline in the interest rates to the desired level will not materialise, notwithstanding the continued lower inflation rate.

The large borrowing programmes of government year after year have also put pressure on the absorptive capacity of the market. The banking system now holds government securities of around 34 per cent as against the minimum statutory requirement of 25 per cent. Steps should be taken to bring the statutory liquidity ratio to the mandated 25 per cent.

Another factor effecting the interest rate structure in India, Bajaj said, is the high level of non-interest operating expenses of public sector banks. This works out to 2.5 per cent to three per cent total assets. One of the reasons is high non-performing assets.

He regretted that no concrete steps have been suggested in the policy. There is need to give high level of functional autonomy to banks to make them more competitive. No steps have been announced to restructure the public sector banks as companies under the Companies Act and to scrap the parliamentary status under which public sector banks are presently incorporated.

The Punjab, Haryana and Delhi Chamber of Commerce and Industry or PHDCCI president K S Mehta said the objective of the Monetary and Credit Policy of the RBI for the year 2000-01 is primarily focussing on structural issues with a view to strengthening the banking system. This would be done by adopting prudential norms of international standards, deepening of debt market and risk management system in banks with global capital adequacy norms and technology upgradation in the banks.

Mehta welcomed the structure of monetary policy and drought relief but said that the disturbing factor is high fiscal deficit and government borrowing programme of Rs 170 billion which would crowd at the borrowing by the trade, industry and corporates.

A welcome feature is the advice to banks to provide micro credit to individual borrowers, finance to self-help groups and agriculture credit of liberalised terms, he said.

The chamber chief added that another positive step in the budget follow-up is enhancement of flow of bank credit to tiny units by enhancing limit of loan from Rs 100,000 to Rs 500,000. Other positive steps are composite loan limit from Rs 50 million to Rs 100 million, further liberalisation of export credit refinance facility covering export bills rediscounted with Exim Bank without sustaining reduction in refinance limits from the RBI, enhancement of limit for post award proposal by authorised dealers to Rs 500 million and for Exim Bank to Rs 2 billion, Mehta said.

He noted that guidelines of entry of banks into insurance though restrictive in nature is also timely since the Insurance Regulatory and Development Act notification is now an open issue.

The RBI should have reduced cost rates for export by at least one per cent and also review the system spreads over prime lending rate particularly for overdue export finance which is very high, said Mehta. Since transaction cost of exports is high, it makes them uncompetitive, he regretted.

CRR should have also been reduced by at least one per cent as the expert committee has suggested to lower rates to three per cent. The credit policy should have come with specific guidelines for service sector, particularly software, resurgent projects, construction projects, to generate demand.

High prudential and soft lending norms without collateral and guarantee is needed. The credit policy should have reviewed the bill discounting and re-discounting facility and advised the banks to abolish group approach in lending, Mehta said.



RBI Governor Bimal Jalan's policy statement

RBI's Credit and Monetary Policy 2000-2001

RBI's Credit and Monetary Policy 1999-2000

RBI's Credit and Monetary Policy 1998-1999


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