Mumbai: Below is the summary of the Monetary and Credit Policy 2003-04 announced today:

Stance of Monetary Policy for 2003-04
Spelling out the stance of monetary policy, Governor said that as per present assessment, and barring the emergence of adverse and unexpected developments in the various sectors of the economy, the overall stance of monetary policy for 2003-04 will be:

• Provision of adequate liquidity to meet credit growth and support investment demand in the economy while continuing a vigil on movements in the price level.
  
• In line with the above, to continue with the present stance of preference for a soft and flexible interest rate environment within the framework of macroeconomic stability.

Monetary Measures
(a) Bank Rate

• It is proposed to reduce the Bank Rate by 0.25 percentage point from 6.25 per cent to 6.0 per cent with effect from the close of business today (April 29, 2003).

Commenting on the Bank Rate reduction, Governor said that the Bank Rate has been reduced from 11.0 per cent to 6.0 per cent, i.e. by 500 basis points in the last five years. This is the sharpest reduction in the Bank Rate since independence. Unless the domestic and international circumstances change, Governor stated, the policy bias in regard to the Bank Rate is to keep it stable until the mid-term Review of October 2003.
(b) Cash Reserve Ratio
As a further step in moving towards the medium-term objective of reducing cash reserve ratio (CRR) of banks to the statutory minimum level of 3.0 per cent, Governor proposed to:

• Reduce CRR further from 4.75 per cent to 4.50 per cent effective fortnight beginning June 14, 2003.

Governor mentioned that with this reduction, CRR would have been reduced by 4.0 percentage points in the last three years.
(c) Payment of Interest on eligible CRR Balances on Monthly Basis
Governor informed that as indicated in the mid-term Review of October 2002, interest on eligible CRR balances maintained by banks with RBI would be paid on monthly basis from April 2003.
(d) Export Credit Refinance Facility
Governor announced that in response to the suggestion received from the exporting community, in the present uncertain geopolitical environment, it has been decided:

• To continue extending refinance facility to eligible export credit remaining outstanding under post-shipment credit beyond 90 days and up to 180 days.

This measure will be reviewed again in October 2003.
(e) Back-stop Facility
Governor indicated that in order to increase the efficacy of liquidity adjustment facility (LAF) operations, it is desirable to rationalise the multiplicity of rates at which liquidity is absorbed/injected. Accordingly, Governor proposed that:

• The "back-stop" interest rate will be at the reverse repo cut-off rate at which funds were injected earlier during the day in the regular LAF auctions;
  
• Where no reverse repo bid is accepted as part of LAF auction, the "back-stop" interest rate will generally be 2.0 percentage points over the repo cut-off rate of the day under LAF;
  
• On the days when no bids for repo or reverse repo auctions are received/accepted, the "back-stop" interest rate will be decided by RBI, on an ad hoc basis.

With the above changes, Governor said it is expected that the "back-stop" interest rate will be lower by 1.0 percentage point over the present "back-stop" rate. This should benefit banks (as well as borrowers) using this facility.
Interest Rate Policy
(a) Prime Lending Rate and Spreads
In order to enhance transparency in banks' pricing of their loan products as also to ensure that the PLR truly reflects the actual costs, Governor advised banks to consider the following suggestions for determination of their prime lending rates:

• Banks should take into account their (i) actual cost of funds, (ii) operating expenses and (iii) a minimum margin to cover regulatory requirement of provisioning/capital charge and profit margin, while arriving at the benchmark PLR. Banks should announce a benchmark PLR with the approval of their Boards.
  
• As is already the case, the benchmark PLR would continue to be the ceiling rate for credit limit up to Rs.2 lakh.
  
• Since all other lending rates can be determined with reference to the benchmark PLR arrived at as above by taking into account term premia and/or risk premia, the system of tenor-linked PLR deserves to be discontinued. These premia can be factored in the spread over or below the PLR. The effective date for discontinuation of the tenor-linked PLR will be further discussed with banks and a decision will be announced separately in due course.

Governor further advised that in the interest of customer protection and to have greater degree of transparency in regard to actual interest rates charged to borrowers, banks are urged to continue to provide information on maximum and minimum interest rates charged together with the benchmark PLR. The system of determination of benchmark PLR by banks and the actual prevailing spreads around the benchmark PLR would be reviewed in September 2003.
(b) Non-Resident External (NRE) Deposits
In order to provide uniformity in the maturity structure to all types of repatriable deposits whether they are in foreign currency or in rupees, Governor proposed that:

• The maturity period of fresh NRE deposits, with immediate effect, will be 1 to 3 years in line with FCNR(B) scheme. This will also apply to NRE deposits renewed after their present maturity period.

Credit Delivery Mechanism
(a) Priority Sector Lending

1. Liberalisation of credit for drip irrigation/sprinkler irrigation system/agricultural machinery

Governor said that the present limit on advances granted to dealers in drip irrigation/sprinkler irrigation system/agricultural machinery, located in rural/semi-urban areas were Rs.20 lakh under priority sector lending for agriculture. As the scheme has been of benefit to the farming community, Governor proposed the following further liberalisation:

• Dealers in drip irrigation/sprinkler irrigation system/agricultural machinery, irrespective of their location, would be eligible for such advances, under priority sector lending for agriculture.

(ii) Housing loans
In view of increasing demand for housing in rural and semi-urban areas, and to improve financing to housing sector in these areas, Governor proposed that:

• Banks, with the approval of their Boards, will be free to extend direct finance to housing sector upto Rs.10 lakh in rural and semi-urban areas as part of priority sector lending.

(b) Relief for Drought affected Farmers
Governor said that in order to further mitigate the hardship of farmers in drought-affected states, the Government had decided, as a one-time measure, to waive completely, the first year's deferred interest liability on Kharif loans in those states. This instalment of deferred interest, which is to be waived by banks would be reimbursed by the Government. No interest would be charged on the deferred interest, and the balance of the deferred interest would be recovered in reasonable instalments.
(c) Relaxation on Infrastructure Financing
Governor said that certain relaxations relating to regulatory and prudential aspects have already been given to banks to boost credit flow to this sector. These include: enhancing the scope of definition of infrastructure lending, relaxing the prudential single borrower exposure limit to 20 per cent of capital fund, assigning a concessional risk weight of 50 per cent on investment in securitised paper pertaining to an infrastructure facility, etc.
(d) Micro-finance
In order to put in place a more vibrant micro-finance delivery environment, Governor said RBI had a wide-ranging interface with a cross-section of micro-finance providers. Pursuant to these interactions, four informal Groups have been set up by RBI to look into issues relating to (i) structure and sustainability; (ii) funding; (iii) regulations; and (iv) capacity building for micro-finance delivery.
Money Market
(a) Moving towards Pure Inter-bank Call/Notice Money Market
Governor recalled that in the annual policy Statement of April 2001, the intention to move towards a pure inter-bank call/notice money market by gradually phasing out non-bank participation was highlighted. In view of subsequent encouraging developments, Governor proposed that:

• Stage II of the transition to a pure inter-bank call/notice money market will be effective from the fortnight beginning June 14, 2003, wherein non-bank participants would be allowed to lend, on average in a reporting fortnight, up to 75 per cent of their average daily lending in call/notice money market during 2000-01.

Governor, however, mentioned that in case a particular non-bank institution has difficulty in developing proper alternative avenues for investment of excess liquidity, RBI may consider providing temporary permission to lend a higher amount in call/notice money market for a specific period on a case by case basis.
(b) Reporting of Call/Notice Money Market Transactions on NDS Platform
Governor proposed that:

• From the fortnight beginning May 3, 2003, it would be mandatory for all Negotiated Dealing System (NDS) members to report all their call/notice money market deals on NDS. Deals done outside NDS should be reported within 15 minutes on NDS, irrespective of the size of the deal or whether the counterparty is a member of the NDS or not.
  
• Full compliance with the reporting requirement to NDS will be reviewed in September 2003. In case there is repeated non-reporting of deals by an NDS member, it will be considered whether non-reported deals by that member should be treated as invalid with effect from a future date.

(c) Introduction of New OTC Rupee Derivatives
Based on the recommendation of the Working Group on Rupee Derivatives Governor proposed that to begin with:

• Less complex over-the-counter (OTC) interest rate rupee options should be permitted in the first phase which include vanilla caps, floors and collars, European Swaptions, call and put options on fixed income instruments/ benchmark rates and unleveraged structured swaps based on overnight indexed swaps (OIS) and forward rate agreements (FRAs) where the risk profile of such structure is similar to that of the building blocks.
  
• Scheduled commercial banks, financial institutions and PDs should be allowed to both buy and sell options; corporates may sell options initially without being the net receivers of premium.

Detailed guidelines with respect to the operationalising the above proposals would be issued in consultation with market participants.

(d) Commercial Paper
In order to provide further flexibility to both issuers and investors, Governor proposed that:

• Non-bank entities including corporates may provide unconditional and irrevocable guarantee for credit enhancement for CP issue as long as (i) the issuer fulfils the eligibility criteria prescribed for issuance of CP, (ii) the guarantor has as at least one notch higher credit rating than the issuer by an approved credit rating agency, (iii) the offer document for CP should properly disclose : the net worth of the guarantor company; the names of the companies to which the guarantor has issued similar guarantees; the extent of the guarantees offered by the guarantor company, and the conditions under which the guarantee will be invoked.
  
• Banks are allowed to invest in CP guaranteed by non-bank entities provided their exposure remains within the regulatory ceiling as prescribed by RBI for unsecured exposures.

Governor indicated that detailed guidelines on procedures and documentation in this regard will be issued by FIMMDA.
Foreign Exchange Market
(a) Overseas Investment by Mutual Funds - General Permission
At present, mutual funds are allowed to invest in ADRs/GDRs of Indian companies and rated foreign debt instruments/equity within an overall cap of US $ 1.0 billion with the permission of SEBI and RBI. In order to simplify the procedure and to facilitate expeditious processing of investment proposals Governor proposed:

• To accord general permission to mutual funds for their overseas investments within the cap, once SEBI's approval has been obtained. This general permission will be available until further notice.

(b) Investment by Indian Corporates/Individuals in Rated Bonds/Fixed Income Securities
At present Indian corporates and resident individuals are permitted to invest in equities of listed companies abroad subject to certain conditions. Governor proposed to extend this facility to debt instruments also. Accordingly:

• Indian corporates and resident individuals will also be permitted to invest in rated bonds/fixed income securities of listed eligible companies abroad subject to certain conditions.

(c) Forward Cover for Inflows under Foreign Direct Investments
General permission has been accorded to banks to offer forward contracts to overseas investors to hedge their Foreign Direct Investment (FDI) to the extent of investments made in India. However, such FDI inflows are not permitted to be sold forward to banks. In order to provide greater flexibility to the overseas investors and encourage flow of FDI, Governor proposed:

• To allow overseas investors making long term investments to hedge their forex exposures in India, pending investment, by entering into forward sale contracts with banks in India.

(d) Forward Cover for Forex Exposures where Settlement is in Rupees
At present resident entities are not allowed to book forward cover in case of transactions denominated in foreign currency but settled in rupees. Keeping in view the exposures of such entities to exchange rate risk, Governor proposed:

• To permit entities which have transactions denominated in foreign currency but settled in rupees to book forward contracts. Such contracts should be held till maturity and cash settlement would be made on the maturity date.

(e) Cross Currency Forward Cover for FCNR Deposits
At present, non-resident Indians (NRIs) and Overseas Corporate Bodies (OCBs) can enter into forward contracts with rupee as one of the currency to hedge the balances held in FCNR(B) or NRE Accounts. However, cross currency covers are not permitted for such deposits. In order to facilitate better risk hedging by NRIs and OCBs, Governor proposed:

• To allow NRIs/OCBs to book cross currency forward contracts to hedge the balances held in their FCNR(B) accounts. However, contracts once cancelled cannot be rebooked.

(f) Forex Clearing
Governor informed that the live operations for the clearing and settlement of spot and forward dollar-rupee transactions has commenced from November 12, 2002 by CCIL. This new facility for clearing and settling dollar rupee transactions in India is likely to provide substantial cost and time benefits to banks.
Government Securities Market
Reviewing the developments in the government securities market, Governor said that the Reserve Bank has taken a number of initiatives in the recent past in developing and deepening the government securities market. Further, NDS has been made operational for enabling on-line trading settlement and dissemination of trade information on a near real-time basis. The supervision of PDs was strengthened with prescription of certain minimum disclosure norms and extending repo eligibility to CSGL/gilt account holders.
Urban Co-operative banks
Relexations in respect of gold loans, deposits with other UCBs and size of unsecured advances
In pursuance to the recommendations made by the Committee, set up by the Government (Chairman: Hon' Shri Anant Geete) the following measures are proposed in consultation with the Government of India.
(a) 90 days Norm for Recognition of Loan Impairment - Exemptions

• To exempt gold loans and small loans both up to Rs.1 lakh from the 90 days norm for recognition of loan impairment. These loans would continue to be governed by 180 days norm for classification as NPA.

(b) Facility for Placement of Deposits with other Scheduled UCBs

• To permit UCBs to place deposits with strong scheduled UCBs (other than banks classified as weak or sick) with certain conditions. Detailed guidelines in this regard are being issued separately.

(c) Enhancement of Limit in the Ceiling on Unsecured Advances
In order to provide greater flexibility, it is proposed to revise the ceiling on the unsecured advances by scheduled UCBs to Rs.2 lakh. Upward revision has also been made in the ceiling on unsecured advances in respect of non-scheduled UCBs depending on their size. The enhanced ceiling would not, however, be applicable to weak/sick UCBs.
(d) Timely Compliance with Inspection Reports
The Joint Parliamentary Committee which enquired into the stock market scam and matters relating thereto, recommended that:
"RBI must introduce a system whereby the irregularities pointed out in the annual inspection reports are removed by the banks and compliance report is submitted within a period of six months from the date of inspection".

• In line with the above recommendation of the JPC, it has been decided that UCBs would be given maximum period of six months from the date of the inspection report to remove the irregularities pointed out in the inspection report in all respects, failing which RBI will invoke the penal provisions.

(e) Mandatory Concurrent Audit
The Joint Parliamentary Committee further recommended that:
"As an apex body, though it is not possible for RBI to monitor each and every transaction, it is essential that concurrent audit is conducted in the banks on a regular basis. The RBI may consider making this mandatory".

• In line with the above recommendation of the JPC, all UCBs are advised to introduce concurrent audit with immediate effect.

(f) Loans and Advances by UCBs to their Directors
Governor said that in regard to loans or advances or other financial accommodation by UCBs to their directors, the Joint Parliamentary Committee has recommended that:
"In order to prevent irregularities of the type surfaced in the case of some of the cooperative banks which were examined by the Committee, they are of the view that full ban on granting of loans and advances to the directors and their relatives, or the concerns in which they are interested needs to be imposed. Appropriate legal procedures may be initiated to ensure that there is no conflict of interest in the grant of loans and advances to the directors and their relatives and the concerns in which they are interested".

• In line with the above recommendation of the JPC, UCBs, with immediate effect, should not grant loans and advances (both secured and unsecured) to directors, their relatives and firms/concerns/ companies in which they are interested.

Governor, however, clarified that existing advances extended prior to April 29, 2003, may be allowed to continue up to the date when they are due. These advances should not be renewed or extended further.
Supervision and Monitoring
Progress made in respect of certain announcements made in the mid-term Review of October 2002 is reviewed below.
(a) Risk Based Supervision
Governor said that certain management processes were initiated by RBI for switching over to Risk Based Supervision (RBS) of banks during 2003. It is proposed to implement RBS of a few select banks on pilot basis during April-June 2003. Based on the experience gained, the RBS would be extended to all banks in a phased manner.
(b) Prompt Corrective Action
Governor said that an internal Group was set up to study the impact of the Prompt Corrective Action (PCA) framework on select weak banks. The scheme of PCA has been put in place initially for a period of one year and would be reviewed in December 2003. Banks have been advised to place the scheme before their Boards and take necessary steps in advance in order to ensure that as far as possible, they do not come within the scope of PCA framework.
(c) Consolidated Accounting and Supervision
Governor said that the final guidelines on consolidated accounting and supervision have been issued and banks were advised to ensure strict compliance commencing from the year ended March 31, 2003. The guidelines would be reviewed after one year from the date of implementation.
(d) Macro-prudential Indicators
Governor informed that the salient features of the macro-prudential indicators (MPIs) were enhanced and the review of the same for March 2002 was published in the Report on Trend and Progress of Banking in India 2001-02.
(e) Other Supervisory Initiatives
Governor highlighted other supervisory initiatives as under:

1. The Reserve Bank has issued, in December 2002, a guidance note on Risk-Based Internal Audit System to banks. Banks are advised to place the same before their Boards for initiating necessary steps for transition to the system in a phased manner.
   
2. Detailed guidelines for preventing slippage of NPA accounts from sub-standard to doubtful/loss category were issued to banks suggesting, inter alia, that banks can introduce a new asset category of "Special Mention Accounts" in between "standard" and "sub-standard" accounts for their own internal monitoring and follow-up.
   
3. A comprehensive check-list for conducting computer audit recommended by the Committee on Computer Audit was circulated to banks and FIs. In addition, an Information System Audit Cell has been formed in RBI to scrutinise Annual Financial Inspection reports for initiating corrective action, if any, at the early stage. The Cell has also been entrusted with the work of updating the check-list with latest developments, revision of guidance notes for banks on risks and controls in a computer and communication systems, and updating the Manual for inspection of banks in computerised environment on an ongoing basis.

Prudential Measures
(a) Investment Fluctuation Reserve
As suggested by banks, and to give further relaxation in building IFR, Governor proposed that:

• While IFR would continue to be treated as Tier II capital, it would not be subject to the ceiling of 1.25 per cent of the total risk-weighted assets. However, for the purpose of compliance with the capital adequacy norms Tier II capital including IFR, would be considered up to a maximum of 100 per cent of total Tier I capital.

(b) Branch Licensing
In order to encourage more efficient banking services all over the country, Governor proposed that:

• RBI will consider favourably any proposal for transfer of branches in rural and semi-urban centres from one commercial bank to another by mutual agreement. Banks will be expected to ensure that such mutually agreed transfers do not adversely affect the available banking services in that area.

(c) Provisioning in respect of NPAs which would be sold to
Securitisation/Asset Reconstruction Companies
Governor mentioned that the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, allows securitisation/ reconstruction company created under the Act, to purchase non-performing assets (NPAs) from banks. In order to facilitate sale of NPAs to securitisation/reconstruction companies, guidelines to banks and FIs have been issued. Governor advised banks to build up provisions, significantly above the minimum regulatory requirements, for their NPAs particularly for those assets which they propose to sell to securitisation companies/ reconstruction companies.
Technology Upgradation
Governor said that the Reserve Bank has assigned priority to the upgradation of technological infrastructure in the financial system. In this direction, the Payments System Vision Document giving the nature and direction of reforms needed to achieve the vision was set out. Substantial progress has been made since then for developing a modern, efficient, integrated and secure payment and settlement system for the financial services sectors.
Developments in Currency Management System
Governor said that over the years, growth in volume of currency has increased and posed serious problems in regard to the currency management function of RBI in the areas of supply of notes, quality of notes and withdrawal of notes from circulation. As part of the customer service, banks have been advised to open certain chest branches on Sundays for providing note exchange facility and distribution of coins. A Currency Link was set up at RBI website which covers various aspects related to Indian currency and coinage, images and security features of contemporary bank notes in Mahatma Gandhi series, frequently asked questions (FAQs) and press releases on currency issues. Governor advised banks to give wide publicity to the initiatives in the area of currency management for convenience of the public as also provision of good quality bank notes.
Legal Reforms
Governor mentioned that in the recent past, changes in the financial markets and advancement in information and technology have necessitated changes in legal structure. Accordingly, various proposals have been submitted to the Government for making the legal system more efficient to encounter the emerging scenario.