Mid-term Monetary and Credit Policy: The after-effects

Our Banking Bureau
30 October 2002

Jaswant Singh praises Credit Policy New Delhi: Indian Finance Minister Jaswant Singh has termed the Reserve Bank of India’s (RBI) Credit Policy as progessive. “The policy is progressive. I think it is a forward-looking and appropriate Credit Policy. If interest rates are lowered, it will benefit the common people.” Stating the RBI would have factored in the monsoon failure while unveiling its Credit Policy, Singh said the loss in food grain production during the kharif season due to a poor monsoon is expected to be made up during the rabi season. “I am hopeful that the rabi food grain output will improve.”

SBI, BoB, Central Bank of India cut rates Mumbai: Following the RBI’s lowering of Bank Rates, State Bank of India has cut deposit rates by 50 basis points with effect from 1 November 2002. Deposit rates for senior citizens have also been lowered by 25 basis points. Bank of Baroda (BoB) has cut the deposit rates of the three-year period by 25 basis points. The bank had already cut deposit rates by 25 basis points in the one-to-two-year categories a week prior to the Credit Policy. Central Bank of India has lowered the prime lending rate (PLR) by one percentage point in two tranches. Immediately, the PLR will come down from 12 per cent to 11.50 per cent and go down further to 11 per cent in three months. The bank will also reduce its deposit rates, particularly in the longer tenor fixed deposits, by around 50 basis points. Variable interest rate deposits are being retained at their present levels.

Industry not pleased with 25 basis points cut New Delhi: Industry associations were expecting a higher cut in the Rates, which would have provided a thrust to the economy. So they are disappointed. The Federation of Indian Chambers of Commerce and Industry described the policy as being one of “abundant caution” and the Bank Rate cut fell short of industry expectations. The Associated Chambers of Commerce and Industry said in view of the tough global competition and comparatively poor infrastructure, the industry was hoping for a reduction of 0.50 percentage point in the Bank Rate and cash reserve ratio to reinvigorate the economy. The PHD Chamber also felt that not enough has been done to bring down the lending rates. The Confederation of Indian Industry said the 25 basis point cut was on expected lines but wondered whether commercial banks would reduce their lending rates to reflect the cut. The Federation of Indian Export Organisations (FIEO) pointed out that the policy offered no respite to exporters. It felt that the comfortable foreign exchange position had made the government confident that it does not need any support from the export sector.

RBI’s focus on agriculture, small businesses Mumbai: In order to provide impetus to agriculture and small businesses, RBI governor Bimal Jalan proposed that the limit of advances granted to dealers in drip irrigation / sprinkler irrigation system / agricultural machinery, located in rural / semi-urban areas has been increased from Rs 10 lakh to Rs 20 lakh under priority sector lending for agriculture. For small businesses, Jalan proposed to increase the existing limit of Rs 10 lakh to Rs 20 lakh without any ceiling for working capital. Banks will now be free to fix individual limits for working capital depending on the requirement of different activities. The individual credit limit to artisans, village and cottage industries have been raised to Rs 50,000 from Rs 25,000 and the limit will be under the overall limit of 25 per cent advances to weaker sections under the priority sector or 10 per cent of the net bank credit and to increase the existing limit of housing loans for repairing damaged houses from Rs 50,000 to Rs 1 lakh in rural and semi-urban areas and to Rs 2 lakh in urban areas.

Interest rates on export credit liberalised Mumbai: In order to encourage competition among banks and also to increase the flow of credit to the export sector, Jalan proposed to liberalise interest rates on rupee export credit in two phases. Accordingly, in the first phase, it is proposed that the ceiling rate of the PLR plus 0.5 percentage point on the pre-shipment credit beyond 180 days and up to 270 days and post-shipment credit beyond 90 days and up to 180 days will be deregulated with effect from 1 May 2003. Banks will have the freedom to charge PLR or sub-PLR rates subject to approval of their boards. In the second phase, with effect from a date to be announced later, it will be considered whether the ceiling rates on pre-shipment credit up to 180 days and post-shipment credit up to 90 days should also be discontinued to encourage greater competition in the interest of exports. Imparting flexibility in the repayment of export credit, the government proposed that subject to mutual agreement between the exporter and the banker, the repayment / prepayment of the pre-shipment credit will henceforth be permitted. For this purpose, balances held in the EEFC account of the exporter can also be used. Banks are now free to decide FCNR (B) deposit rates denominated in Japanese yen, which may be equal to or less than Libor/Swap rates of corresponding maturities till a further notice. The interest rate ceiling on FCNR (B) deposits denominated in other currencies will remain unchanged at the prevailing level of Libor/Swap rates of corresponding maturities minus 25 basis points.

Regulation of urban cooperative banks Mumbai: The RBI had earlier suggested a separate supervisory authority for urban cooperative banks (UCBs) in the interests of public depositors, with representatives of the centre, the state and other interested elements. This issue was examined recently by a committee under the chairmanship of the minister of state for finance and the committee, while agreeing that the duality of control should be done away with recommended that the RBI should be vested with full powers for regulation and supervision of UCBs. The RBI governor assured that while the RBI will do its best in implementing the decisions of the government in this regard, it might be kept in view that in case immediate measures are not taken to remove the duality of control, it would be difficult to make the supervisory system effective. The RBI has also urged UCBs, regional rural banks and local area banks to reduce the interest rates offered on saving and current accounts in order to rationalise rates in the banking sector.