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RBI's Credit Policy seeks to widen India's financial markets

The Reserve Bank of India, or RBI, today announced the policy guidelines for entry of commercial banks into the insurance business, besides introducing several measures towards deepening and widening the Indian financial markets.

Banks having minimum net worth of Rs 5 billion and satisfying other criteria with regard to capital adequacy and profitability, will be allowed to undertake insurance business through joint venture on risk participation basis.

The RBI will consider bank equity contribution in the joint venture up to 50 per cent and on a case-to-case basis.

In its Monetary and Credit Policy for the year 2000-2001, the RBI said that it would proceed with the implementation of a full-fledged liquidity adjustment facility, or LAF, replacing the interim liquidity adjustment facility. The new scheme will be introduced progressively in convenient stages in order to ensure smooth transition.

For the development of financial markets, the RBI has given greater operational flexibility to banks in areas like converting themselves into universal banking, fixing of interest rate, fixing of FCNR (foreign currency non resident Indian) deposit rates, resources mobilisation export credit refinance facility, and call money and debt market operations.

Later addressing the chief executives of banks, the RBI Governor Bimal Jalan said that the RBI would continue to monitor domestic monetary and external developments, and tighten monetary policy through the use of instruments at its disposal when necessary.

Banks and financial institutions should make adequate allowances for unforeseen contingencies in their business operational plans and take into account the implication of changes in the monetary and external environment on their operations, he said.

Jalan emphasised the need to provide sufficient bank credit for growth without creating any inflationary pressure in the economy.

He said that concerted action would be required to move forward with financial reforms in a competitive environment, coupled with a reduction in government fiscal deficit and wider public acceptance of the need for flexibility in the administered interest rate.

In this context, he called for a national consensus on an effective and time-bound programme of fiscal correction.

He said, the large borrowing programme of the government year-after-year has put pressure on the absorptive capacity of the market.

The banking system now holds the government securities of around 34.3 per cent of its net demand and time liabilities, as against the minimum statutory requirement of 25 per cent.

The RBI advised banks to voluntarily build in risk-weighted components of their subsidiaries into their own balance sheet on a national basis.

This should be at par with the risk weight applicable to banks' own assets. The banks should also earmark additional capital in their books over a period of time so as to obviate the possibility of impairment to their net worth when switching over to unified balance sheet for the group as a whole.

The RBI said that greater attention must be paid to risk management systems and selection of trained personnel.

As per the action plan for the year 2000-2001, the RBI laid out a series of strategic actions that include technology upgradation and integration of the various segments of payment and settlement systems.

This would be through the introduction of real-time gross settlement and consolidation of various deferred net clearing settlement sprayed across various cities.

The RBI has extended the term of Regulation Review Authority, or RRA, for a further period of one year from April 1, 2000. The RRA was set up last year to review the RBI rules and regulations and reporting system based on the suggestions received from the general public.

The review of credit and monetary development in the first half of current year will be undertaken in October 2000 and mid-term review will be confined to a review of monetary development and projection for the second half of the year.

To carry forward the Narasimham Committee recommendations, the RBI reduced the minimum maturity period for certificates of deposit, or CDs, to 15 days from the present 3 months, and brought it on par with other instruments like commercial paper and term deposits.

To provide more flexibility for pricing of rupee interest rate derivatives and to facilitate some integration between money and foreign exchange markets, the use of interest rates implied in the foreign exchange forward market as a benchmark would be permitted. This would be in addition to the existing domestic money and debt market rates.

The facility to non-bank entities for routing transactions through primary dealers, or PDs, would be further extended up to end-December 2000.

Simultaneously, steps will be initiated to extend repo facility to such entities through the subsidiary general ledger, or SGL, accounts.

(Repo: repurchase agreements or ready forward deals, a secured short-term -- usually 15-day -- loan by one bank to another against government securities. Legally, the borrower sells the securities to the lending bank for cash, with the stipulation that at the end of the borrowing term it will buy back the securities at a slightly higher price, the difference in price representing the interest.)

The RBI is now in the process of modifying the guidelines for issue of commercial paper, or CP, in order to provide more liquidity and depth to the product.

It also proposed to introduce a scheme for automatic invocation by the SGL account holder of undrawn refinance and liquidity support from the RBI for facilitating smooth securities settlement.

The facility will be available only to banks and PDs subject to adequate safeguards.

To provide more flexibility to banks and enable them to choose an optimum strategy of holding reserves, depending upon their intra-period cash flows, the RBI has decided to reduce the requirement of a minimum of 85 per cent of the cash reserve ratio, or CRR (CRR = the fortnightly cash balances maintained by commercial banks with the central bank), balances to be maintained to 65 per cent with effect from the fortnight beginning May 6, 2000.

This is expected to result in smoother adjustment of liquidity between surplus and deficit units and enable better cash management by banks.

Presently, banks are free to offer fixed or floating rates on NRE and FCNR(B) (Foreign currency non resident Indian - banking) deposits. It has been decided that banks would be permitted as in the case of domestic term deposits to offer differential rates of interest on NRE deposits on size group basis.

The RBI also liberalised the export credit finance facility. The outstanding export credit will form the basis that will enable banks to use rediscounting of export bills without any reduction in refinance limits. Drawal of refinance will be on the basis of export credit eligible for refinance.

The new scheme will come into effect from fortnight beginning May 6.

The RBI asked banks to be more aggressive in recovering dues from borrowers through debt recovery tribunals, or DRTs, and compromise settlement advisory committees.

The central bank said that it was engaging the services of reputed international firms to draw on experiences of other countries and to develop an overall plan for moving towards risk-based supervision, or RBS, which would incorporate international best supervisory practices suited for Indian conditions.

The RBI also advised the banks that micro-credit should form a part of their corporate credit plan and should be reviewed at the highest level in every quarter.

UNI

ALSO SEE

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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