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Bankers expect credit policy to be a cool 'review'

Notwithstanding the comfortable liquidity condition in the banking system, the Reserve Bank of India may not prescribe any measures in its half yearly credit policy on October 30. It may not also restructure the banking system, in spite of slowdown in productivity, increasing non-performing assets of banks, lack of consumer demands, rising inflationary pressures along with money supply and growing fiscal deficit.

According to banking circles in Bombay, RBI governor Dr Bimal Jalan is unlikely to announce any major policy changes at this juncture and the half-yearly credit and monitory policy would merely be an exercise to monitor and review the economic progress.

The recent downgradation of India's sovereign rating by Standard and Poor's agency had already been discounted by the markets as well as bankers in Bombay. The economic packages announced by Prime Minister Atal Bihari Vajpayee and Finance Minister Yashwant Sinha on Saturday and Sunday had neutralised the impact of downgradation if any.

However, the lowering of rating might affect the external borrowing rates for our corporates and government agencies in the near future, said M S Verma, chairman of State Bank of India. ''We have enough resources to match our proposed infrastructure spendings. There was no change in the perceptions of the economy in the last two days,'' he said.

Verma also ruled out any changes in the interest rate structure in the forthcoming credit policy since the bank credit offtake from the corporate sector has just started picking up from the current month as compared to negative growth rate in the previous months.

Citing Dr Jalan's statement in last April's credit policy, bankers said that this time the governor's statement would generally be confined to a review of monetary developments in the first half of the year, particularly in the light of international scenario and to such changes as may be necessary in monetary projections in the second half of the year.

The only positive news on the external front was the move by the both houses of US Congress to empower President Clinton to waive the economic sanctions on India and Pakistan. This has improved the likelihood of removal of economic sanctions in near future.

Analysts at ICICI Securities and Finance said that with the industrial slowdown resulting in lower demand for bank credit, any hike in prime lending rates and bank rate would result in a further squeeze. Moreover, with an inflow of over Rs 130 billion to the banking sector from Resurgent India Bonds after accounting for the cash reserve requirement below 9.5 per cent of the cost, the case for an increase in lending rates becomes weaker.

The RBI is also unlikely to contract money supply to rein in inflation because the current inflation is essentially a supply-side problem with low level inflation in manufacturing product group. Broad money growth has averaged 18 per cent in the first half, well above the targeted 15-15.5 per cent for the full year.

In addition, the wholesale price index and consumer price index are hovering at politically sensitive levels of eight and 15 per cent respectively.

The credit policy is likely to spell out a time-table to strengthen banking sector norms. The capital adequacy ratio target is likely to be raised to nine per cent by fiscal 2000 and 10 per cent by 2002 with the possibility of five per cent market risk weight assigned to government securities, as recommended by the second Narasimham Committee report.

In addition, a schedule may be drawn to implement the asset-liability management system by banks in a phased manner, the draft guidelines of which have already been circulated among the banks.

Regarding the second half of the current year, bankers said the main policy objectives would be to ensure availability of sufficient bank credit to the commercial sector and to control inflation. In the currency markets, since the Indian rupee continued to be nearly stable, there is also no room to effect any change in repo rates.

Analysts at J P Morgan, a research firm, said that the policy would focus more on strengthening of the financial system and banks rather than giving any firm direction on interest rate movement over the rest of the year. With increased market volatility and vulnerability to external shocks, use of risk management systems needs to be made mandatory for banks and financial institutions.

They also ruled out any reduction in CRR while advocating for a hike in prime lending rate and bank rate following increasing pressure on interest spreads due to growing competition.

UNI