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Credit Policy: Assocham seeks review of cross subsidisation for priority sector

The Associated Chambers of Commerce and Industry of India has sought review of the present cross subsidisation for priority sector lending to improve the banks margins and help reduce the average lending rates.

In the run-up the busy season credit policy, Assocham president K P Singh has written a note to the Reserve Bank of India Governor Bimal Jalan. Singh said reduction in the cost of bank funds will help the banks. This can be done by paying higher rates on cash reserve ratio or CRR (the fortnightly cash balances maintained by commercial banks with the central bank)or by reducing CRR further, lowering lending rates, and by reducing the 40 per cent pre-emption to priority sector.

It is necessary to reduce the fiscal deficit to reasonable levels so that pre-emption of funds by government is minimised.

He said money supply grew at 17 per cent during 1998-99. In the current year, growth upto September was 5.7 per cent, as against seven per cent in the corresponding period of the last year.

This shows that M3 growth has decelerated which is a good signal. Aggregate deposit growth stood at Rs 358.91 billion upto September 25 compared with Rs 505.95 billion in the corresponding period of the last year, indicating a slowdown. (M1: A measure of money supply which includes all coins and notes in circulation, and personal current accounts. M3: A measure of money supply, including those covered by M2 -- a measure of money, supply, including M1, plus personal deposit accounts -- plus government deposits and deposits in currencies other than rupee.)

However, the data for 1998-99 includes a receipt on account of Resurgent India Bonds He said a factor influencing lending rates is the cross subsidy on account of loans below Rs 200,000. As such loans still have an interest rate ceiling equal to the prime lending rate, and this results in extra loading of costs on loans above this amount. Non-performing assets are over eight per cent and add to the spread between the cost of funds and the lending rates, he said.

UNI

RBI's Credit and Monetary Policy 1999-2000

RBI's Credit and Monetary Policy 1998-1999

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