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CRR cut to 9 pc, bank and interest rates untouched; 30 pc surcharge on import finance withdrawn

The Reserve Bank of India, the country's central bank, on Friday announced a series of measures to release extra liquidity into the banking system to help finance the government's over-sized fiscal deficit and meet credit demand from industry as the economy picks up.

The two-phase one percentage cut in Cash Reserve Ratio or CRR to nine per cent, withdrawal of 30 per cent surcharge on import finance, withdrawal of minimum 20 per cent interest on overdue export bills and withdrawal of ten per cent liabilities on the FCNR (B) scheme were among the major policy changes announced by the RBI. (CRR = the fortnightly cash balances maintained by commercial banks with the central bank)

The RBI has left untouched the bank rate at eight per cent and interest rates of commercial banks.

The first cut of 0.5 per cent or 50 basis points in CRR will be effective from November 6. The second, identical cut will be effective from November 20.

Unveiling the policy statment on ''Mid-term Review of Monetary and Credit policy for the Year 1999-2000'' in Bombay, the Reserve Bank proposed to infuse a huge sum of Rs 80.61 billion lendable resources into the banking system through the CRR cut and withdrawal of FCNR (B) liabilities.

These measures will not only maintain reasonable liquidity and stable interest rate, but also help tide over any unanticipated additional demand for liquidity in the context of the century date change. The RBI has decided to introduce a special liquidity support scheme for banks during the period from December 1, 1999 to January 31, 2000.

Besides extending a number of measures for the development and reforms of the financial sector including money market and debt market, the RBI announcement today further modified various norms related to money market mutual funds or MMMFs, non-banking finance companies or NBFCs, government security markets, valuation of approved securities, credit delivery system, housing finance and infrastructure financing by banks.

Later, addressing the chairmen and chief executives of commercial banks, RBI Governor Dr Bimal Jalan said that the level of CRR continued to be high in view of the need to control the overall expansion of liquidity in the system. A high level of CRR also raises the average cost of funds for banks.

He said there was persistent and large volume of market borrowing by the government giving an upward bias to the entire interest rate structure.

In view of the decline in inflation rate and favourable economic outlook, the governor said that there was a case for a further downward movement in the structure of interest rate.

The RBI has already indicated its policy preference for softening of interest rate to the extent circumstances permit. However, he said that Prime Lending Rate of banks for commercial credit are entirely within the purview of the banks and is no longer set by the RBI.

Banks have to take a decision in this regard by themselves in light of various factors including their own cost of funds, their transaction cost and interest rate ruling in the non-banking sector, he added.

The governor emphasised that the overall stand of RBI would continue to be providing reasonable liquidity in the system, stable interest rate within the existing operational and structural constraints, orderly development of financial market and ensuring financial stability.

Indian forward premia dropped in deals shortly after noon on Friday after the RBI banks' CRR by one percentage point to nine per cent.

Indian government securities were slightly firm in late morning deals and dealers said there was buying on the RBI's liquidity-easing measures.

As per the policy measures, CRR has been reduced from 10 to 9 per cent in two instalments, the first, effective from the fortnight beginning November 6 and the next effective from the fortnight beginning November 20. This will increase the lendable resources of banks by Rs 70 billion.

To improve the cash management by banks, Jalan said the RBI has introduced a lag of two weeks in the maintenance of stipulated CRR by banks. The interest rate structure of 30 per cent on import finance, which has been in force since January '98, has been withdrawn with immediate effect. This will reduce the financing cost of import for the industry.

The minimum rate of 20 per cent interest on overdue export bills has also been withdrawn with immediate effect and banks will have the freedom to decide the appropriate interest rate on overdue export bill.

In line with the policy of minimising the countries short-term external borrowing liabilities, the minimum maturity for FCNR (B) deposits has been raised to one year from the current six months.

Banks, however, will continue to have the freedom to offer floating rate deposit with a maturity of one year or more and interest reset period of six months.

At the same time, the requirement by banks to maintain an incremental CRR of ten per cent on increase in liabilities on the FCNR (B) scheme has been withdrawn with effect from fortnight beginning November 6. This will increase the lendable resources of banks by Rs 10.61 billion.

The RBI also extended the risk weight of 2.5 per cent which was introduced for the risk arising out of market price variation for investment in government and other approved securities. It has been extended to cover all investments including securities outside the statutory liquidity ratio or SLR.

This will take effect from the year ending March 31, 2001. Similarly, the bank's exposure to an individual borrower has been brought down from the existent 25 per cent of the bank's capital fund to 20 per cent, effective from April 1, 2000.

Wherever the existing level of exposure, as on October 31, 1999, is more than 20 per cent, the RBI said that the bank would have to reduce exposure to 20 per cent of capital fund over next two-year period.

The RBI also enlarged the scope of bank financing for infrastructure projects by allowing the banks to exceed the group exposure norms of 50 per cent to the extent of ten per cent, provided the additional exposure is for the purpose of financing infrasutructure projects.

Earlier, the stipulations regarding the ceiling on the quantum of term loans which can be granted by banks for a single project (Rs 1 billion for power project and Rs 5 billion for other projects) has been dispensed with. Banks can now sanction term loans to infrastructure projects within the overall ceiling of the potential exposure norm.

The RBI also decided to withdraw its guideline to banks and financial institutions regarding the launch of MMMFs since all these funds will be now governed by the Securities and Exchange Board of India guidelines and operate within the purview of the SEBI regulations.

However, banks and financial institutions desirous of setting up MMMF, would have to seek necessary clearance from the RBI for undertaking this additional activity before approaching SEBI for registration.

For operational convenience, it has been deicde to allow MMMF to be set up as a separate entity in the form of a trust only.

It has also been decided to permit scheduled commercial banks to offer ''cheque writing'' facility to gilt funds and to those liquid income schemes of mutual funds which predominantly invest in money market instruments.

To facilitate transparency in the functioning of money markets, the RBI proposes to work out modalities of releasing data on volume and call money rates on a daily basis.

UNI

ALSO SEE

RBI Governor Bimal Jalan's policy statement

RBI's Credit and Monetary Policy 1999-2000

RBI's Credit and Monetary Policy 1998-1999

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