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Experts call for CRR cut, growth-oriented, demand-generative credit policy

Senior bankers, analysts and traders in India are anticipating a cut in cash reserve ratio in the run-up to mid-year review of the Reserve Bank of India's Credit and Monetary Policy 1999-2000. The review is slated to be announced on October 29 by RBI Governor Bimal Jalan.

But a cut in CRR, if at all, may be in phases. While boosting liquidity in the system, the cut may not necessarily lower lending rates, they added.

The year 1999 was marked by high government borrowings from the market, making it difficult for industry to access funds. The CRR cut may come as a breather for industry that has long suffered on account of tight liquidity.

In fact, apex chambers of industry have been clamoring for cuts in key bank rates and the CRR. They even petitioned Finance Minister Yashwant Sinha who excused himself saying CRR, etc, fall within the domain of the RBI.

Analysts said RBI Governor Bimal Jalan would like to make the mid-year review a non-event. "Right now, the fiscal side of the economy needs attention and repairing. The focus is on Finance Minister Yashwant Sinha, not Jalan," an analyst told rediff.com.

There might be relaxations of curbs on forex forward contract bookings and cancellations. That is to say, (a) exporters may once again be allowed to enter into forward contracts on the basis of their projected exports rather than merely actual contracted exports, and (b) importers may be allowed to rebook forward contracts they had earlier cancelled, he added.

"What the RBI needs to work on, apart from the health of the banking sector (as per the M S Verma Committee recommendations), is to strengthen the debt market. 'Strengthening the debt market' would include issues such as which players are to be allowed in the market (and on which side), retailing of government securities," he said.

The RBI last cut the CRR (the fortnightly cash balances maintained by commercial banks with the central bank), by 50 basis points in April to 10 per cent. When call money rates fell last week, the hopes of a CRR cut followed suit.

The RBI has been active in checking the call money rates. On October 15 and 16, the rate touched 25 per cent. This prompted the central bank to resort to an unusual liquidity-boosting measure: it bought treasury bills through open market operations.

The Indian rupee has been stable in recent times. This may tempt the RBI to loosen its grip on liquidity. The RBI has made it clear that its long-term objective is to lower the CRR to the statutory minimum of three per cent, analysts pointed out.

Bankers said a cut in CRR would ensure adequate bank funds to cope with any rush of millennium-related deposit withdrawals.

However, they added that a CRR cut may not necesssarily nudge banks to drop their lending rates. Banks in India have wide spreads and they have been under pressure from high operating costs and rising non-performing assets.

Bankers said lending rates slide when deposit rates fall. But in India the mutual fund industry has been active of late. Coupled with the high rates on government savings, it would ensure that deposit rates won't fall.

Top corporates are not complaining. For most of their funds are accessed at rates below the banks' prime lending rate through commercial paper.

Liquidity conditions are not alarming but rising demand for credit and disturbing fiscal situation could strain the system, bankers said. Consequently, interest rates could harden around January 2000 as government borrowings clash with rising credit.

According to some estimates, the central government has so far raised Rs 538 billion. Its target for the fiscal year is Rs 574 billion. Rising defence expenditure and election costs may force the government to overshoot the target, analysts said.

Ashok Pradhan, president, the Punjab, Haryana and Delhi Chamber of Commerce and Industry, said the RBI should bring down the lending rates by at least two per cent in view of prevailing low inflation rate.

The chamber called for a growth-oriented and demand generative busy season credit policy.

The spread levels should be comparable to its counterparts elsewhere in Asian countries, the Chamber said.

The RBI should support increase in credit offtake by boosting new investment activity and encourage forex investment inflows with exchange rate stability. To kickstart the economy, the RBI should ensure easy, adequate and affordable credit for industrial activity to accelerate growth rate.

India's PLR should be comparable with Asian and other neighbouring countries. The RBI should take bold steps, the chamber said.

Further, the banks should reduce the cost of their operations, increase productivity and redeploy staff besides increasing non-fund based activities, which in turn would help banks to soften PLR.

The chamber stressed that financing of infrastructure, software, construction activities should be categorised under priority sector like exports and agriculture and certain percentages be fixed. The norms of promoters' contribution, debt-equity ratio, guarantees and collaterals be promptly reviewed. Credit-worthiness and viability of the project should be the criteria for financing of the projects rather than collaterals and guarantees.

Further, in view of significant role of housing sector to generate demand for core areas, besides employment, it is necessary that adequate finance and refinance facilities be made available at reasonable cost by the banks and the RBI.

There is an urgent need for a mechanism to provide finance to ''builders'' to boost construction activity as they are not getting bank finance in the normal course, till a separate body is constituted to provide finance to builders.

The main concern now is that the ''needy ones'' are not getting adequate credit from the banks while the big companies which are not in need of finance are offered bank credit. In the process, the small- and medium-size industries are hard hit. As against the Nayak Committee's recommendations for 20 per cent of working capital of the projected turnover, latest figures indicate only seven per cent is being provided by banks to SSI units, the chamber pointed out.

The RBI should evolve an effective monitoring mechanism for the implementation of the accepted recommendations of various expert committees with an element of accountability.

The Chamber has suggested that complete waiver of interest should be made applicable to all sick SSI units, two years period for repayment should be granted to all NPAs and viable units should be nursed and rehabilitated.

RBI's Credit and Monetary Policy 1999-2000

RBI's Credit and Monetary Policy 1998-1999

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