BOMBAY, 6 May — The governor of the Reserve Bank of India (RBI), Dr. Bimal Jalan presented the ninth credit policy for 2002-03 and unlike the high fever of expectancy which surrounds a union budget, this slack season policy was considered by many as "quite routine". It was so this time as there were no major surprises expected. Coming against the backdrop of industrial slowdown, the policy aimed to step up the growth momentum with stimulus to housing, agriculture, the small-scale sector and exports.
Before we proceed, it is imperative to understand the relevance of a credit policy, based on which one can assess the current policy. The primary goal of a credit policy, apart from keeping a check on inflation and exchange rate management, is to facilitate liquidity in order to induce economic growth and bring structural reforms to deepen and strengthen the financial markets financing such growth — both long-term and short-term requirements.
So what did the policy have in store for all of us? The 50 basis points cut in cash reserve ratio (CRR) was expected and this is expected to release up to Rs.50 billion liquidity in the markets, which is considered by many as being "overly optimistic".
The market was hoping for, but not expecting, a cut in the bank rate and as expected, it was left unchanged. The government remains a large borrower in order to finance the deficit, so an additional rate cut would have been difficult. But Jalan left the door open by stating that bank rate may be cut by upto 50 basis points depending on monetary developments, but have no time frame for that.
The Governor fixed the target for gross domestic product (GDP) at 6-6.5 percent which, under the current scenario seems a bit too optimistic. But on the positive side, the inflation rate of 4 percent looks achievable. The RBI has also stated that the agriculture sector is likely to grow at a higher rate than last year and there are positive indications of a quicker recovery in the industrial sector with good prospects for export sector.
If there is one message that RBI’s credit policy sent to the banking sector it is this: Learn to price risks efficiently and effectively. In essence, the credit policy calls for re-rating corporates. This, the RBI believes, is critical for diversified growth in the corporate sector. Instead of forcing banks to cut their lending rates, the RBI has resorted to moral persuasion.
Possibly for the first time the central bank has attacked the fragmented pricing of loans issue. Call money rates and the yield on government securities have been at a three-decade low. Yet the bulk of corporates have not been able to get the advantage of the low interest rate regime. They are paying interest rates as high as 16 to 17 percent. This is because hurdles like rigidities in the interest rate structure and the inefficiency of banks make it difficult for banks to cut lending rates. But now, the RBI wants banks to cut the spread over PLR and announce them. This is being hailed as an excellent move as it will stem the practice of differential treatment meted out to corporates by banks.
The central bank has tried to persuade banks to pare their lending rates without tinkering with direct monetary tools like the bank rate or the repo rate. Instead, banks have been asked to price risk in line with the logic of financial sector reforms.
The RBI has also not done any tinkering around with the savings interest rates. The governor indicated that although there is an apparent case for deregulation of interest rates on savings account also, as nearly four-fifths of such savings deposits are held by households, both in urban as well as rural areas.
Given this fact it considered it an inopportune time to deregulate the interest rate on savings account for the present one interesting development is the RBI reducing the risk assigned to home loans. This will allow banks to increase their home loans without additional capital.
Reduction on risk weightage on housing loans and recognition as priority sector loans accorded to mortgage backed securities will surely encourage banks to lend more to this sector. Banks see housing loans as less risky assets given the low delinquency. Apart from increased disbursements, the securitization market is also likely to pick up.
As usual, the policy had a word or two about the banks non performing assets (NPAs). RBI tightened the prudential norms for classification of NPAs and banks would now have to classify an asset a sub-standard if there are defaults for one year (as against eighteen months earlier). Consequently, NPA levels and provisioning are likely to increase. The banks have been given a deadline till 2005 to achieve this level of provisioning. Infact the IDBI Bank has already taken a lead on this with accelerated provisioning of NPAs during FY02.
Another policy development is that in order to make the interest rate more competitive, ceiling rate on foreign currency loans for Indian exporters by banks on export credit is reduced to LIBOR plus 0.75 percentage point from the present LIBOR plus 1.0 percentage point. But one glaring omission in the policy has been the lack of focus on the funding requirements of the infrastructure sector — both by way of long-term funding as well as acquisition financing.
To conclude, the credit policy of 2002-03 has been cautious but the RBI has at the same time managed the balancing act of moving toward a flexible and softer interest rate regime.