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Policy will boost industrial production, says RBI governor

Reserve Bank of India Governor Dr Chakravarty Rangarajan says the new credit policy will lead to greater industrial production and higher export realisation in the current fiscal year, besides containing the inflation rate within the accepted level of six per cent.

Explaining the various aspects of the credit policy announced by RBI on Tuesday, Dr Rangarajan said the banks were expected to reduce their lending rate by at least one percentage point following a cut in bank rate. The reduction in cash reserve ratio and introduction of four per cent interest on cash balances maintained by banks with the RBI would expand the availability of bank finances to the extent of 20 per cent in 1997-98.

Indicating the revival of industrial growth in the second half of the year, he said the non-food credit of the banks shot up by Rs 35 billion in the current year up to October 10 as against Rs 12.78 billion during the same period the previous year. During the period up to October 10, banks deposits rose to Rs 380 billion as against Rs 280 billion the previous year.

Banks also invested heavily to the tune of Rs 83.5 billion in corporate shares, debentures and bonds, taking the overall bank credit to near Rs 118.15 billion.

The policy measures taken by the RBI are as follows:
* bank rate reduction by one percentage point to nine per cent;
* cash reserve ratio cut by two percentage points; *statutory liquidity ratio made uniform at 25 per cent;
* interest rates on domestic term deposits deregulated;
* banks to prescribed a separate prime term lending rate;
* interest rate on pre-shipment rupee export credit reduced by one percentage point;
* bridge loans against equity issues permitted; and,
* improvements in credit delivery for sugar, small-scale industries, trade, transport, services and housing.

Besides, the RBI took several measures for liberalisation of capital account convertibility and for further development of money and government securities markets.

Dr Rangarajan said the thrust of the policy was on reduction of direct methods of control and to use interest rates as signals to bring about efficient functioning of the financial system.

He explained that the measures aim at expanding the lendable resources of banks and reducing the cost of funds without impairing the profitability of banks.

The deregulation of interest rates and the reduction of cash reserve ratio would give enough freedom to banks in the management of their portfolios in optimising profits and productivity. The governor stressed that the gains arising out of these measures would need to be shared with borrowers.

Pointing out that the interest rates have come down sharply during the year so far and that the inflation rate has also dropped significantly, he stressed that banks on their part would also have to make concerted efforts to reduce spreads and pass on some of the efficiency gains in the form of lower interest rates to the borrowers.

The governor said while credit for production is necessary, it is equally important to ensure that the distribution channels -- the services sector and trade -- get the required credit.

In this context, he asked banks to have the arrangements for finance reviewed by their boards with a view to enhancing the resources flowing to trade and to devise alternative methods of assessing the loan requirements of the services sector.

He also asked banks to evolve suitable schemes which will result in the increased availability of credit to these sectors. Two other sectors which need special mention are housing and auto finance, particularly for trucks, and expansion in both these sectors is likely to have large multiplier effects.

With a view to ensuring prompt settlement of dues of small-scale industry units as also to encouraging a "bills' culture," the governor also advised banks to ensure that with effect from January 1, 1998, banks extend not less than 25 per cent of the total inland credit purchases of their borrowers through bills drawn on banks by the sellers concerned.

Dr Rangarajan hoped that bank boards should lay down the loan policies in clear-cut terms in respect of different categories of borrowers: small, medium and large.

He also cautioned bankers that with progressive liberalisation of the financial markets, comprehensive risk management was essential.

Recent international events, he said, have demonstrated the criticality of the soundness of the financial system for maintaining macro-economic stability and for ensuring sustained growth.

In this context, it is imperative that banks, being the vital component of the financial system, should equip themselves to meet the challenges of the second phase of the financial sector reforms which will compel banks to operate in a more competitive environment.

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EXTERNAL LINK:
The Reserve Bank of India busy-season credit policy