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Banks exposure to capital markets within limits, says Reddy

The exposure of banks to capital market activities, including lending to broking firms, is within the Reserve Bank of India stipulated 5 per cent norm, RBI deputy governor Y V Reddy said on Thursday.

"As per information with RBI, there has been no violation of the exposure limit by banks," Reddy told reporters after addressing the annual general meeting of the Indian Banks' Association and Bank's Sports Board in Bombay.

He said the movement in markets -- like the forex and government securities marts -- was stable and there was no problem on the liquidity front.

Referring to the Ahmedabad-based Madhavpura Mercantile Co-operative Bank, whose banking activities were frozen by the RBI following the payment crisis, Reddy said that the apex bank has requested the government for supercession of the bank's board and appoint an administrator.

"We will extend support to the administrator, if and when appointed," he added.

"No single cooperative bank has approached us so far with a request for assistance and there is sufficient liquidity with the systems and individual banks," Reddy said.

Referring to the interest rate regime in his address, Reddy said the emphasis has been on providing greater flexibility to it, however, that does not mean a continuous downward movement.

Reddy said: "The stable rate of interest implied that depending on inflation rate, the nominal interest rate will move up and down. Furthermore, it is necessary for banks to appreciate the need for reduction in their interest spreads."

Referring to the cash reserve ratio (CRR), he said the progressive reduction in CRR was closely related to the pace of reduction in fiscal deficit, monetary developments and uncertainties in forex markets.

"On all these fronts, greater comfort in the past could have helped more rapid reduction in CRR, to achieve the medium term objective," the RBI deputy governor said.

In the medium term perspective, the main challenge would be to subscribe to the proposed New Basel Capital Accord meant to replace the existing 1998 accord, Reddy said. The accord covers issues like prudential requirements including capital adequacy norms for the banks.

The new accord was likely to be finalised by 2001 end and mandated for adoption by 2004, he said, adding, it was likely to be more complex and more binding warranting early and vigorous preparatory work by both banks and RBI.

On the issue of competition between banks and between banks and non-banks, Reddy said there were significant legal and institutional changes that need to be addressed without any serious systemic implications to ensure availability of adequate credit to rural areas and agriculture.

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