BOMBAY, 23 April — The corporate results which have started coming in more than proved the fact that the Indian economy was doing well but now, the Reserve Bank of India (RBI) has itself reiterated this fact with figures.
The RBI credit policy for the year 2001-02 has forecasted a GDP growth of 6 to 6.5 percent. And keeping this fact in mind Bimal Jalan, the chief at RBI has stated that the main objective of this credit policy is to provide the much needed liquidity to the markets.
The RBI assured that the global slowdown is unlikely to affect India’s economic growth although it warned that the industrial outlook at present remains uncertain.
Inflation is seen at being within 5 percent. Current account deficit is seen within 2 percent of GDP Industrial outlook is uncertain.
With these facts bearing heavily on the mind, the RBI has kept the bank rate and cash reserve ratio (CRR) rate unchanged. But the RBI has hiked the interest rate on CRR from 4 percent to 6 percent and this is to be hiked to the levels of the bank rate. This is expected to profit the banks immensely, to the tune of more than Rs.8.00 billion. The RBI has also removed the CRR on inter-bank deposits which is expected to deepen the money market.
The central bank has deferred revision of norms facilitate banks exposure to the equities market by May. The policy has come down strongly on urban cooperative banks. They will not be allowed to lend against shares. It has mooted an apex supervisory body for all cooperative banks. Urban co-op banks will now have to unwind broker loans and direct share investments.
This time around, the policy had a lot of reforms for the banking sector, what with the securities scam breaking so badly. So let us take a look mainly at the reforms being carried out for the Indian banking sector.
The RBI in the credit policy has revised downward the ceiling at 50 basis points to LIBOR/SWAP level. At present, banks are free to accept FCNR(B) deposits for a maturity period of 1-3 years and to offer fixed or floating rates, the latter with a interest reset period of six months, subject to the ceiling of LIBOR/SWAP rates plus 50 basis points for the corresponding maturity.
Based on the feedback received from the banks, the Reserve Bank of India, in its credit policy for 2001-02, has decided to revise the above ceiling downward to LIBOR/SWAP rates for the corresponding maturity.
Moreover, the RBI has now given more flexibility. Banks have been given the freedom to offer fixed/floating rates on term deposits and allow premature withdrawal of such deposits.
As per the existing guidelines on domestic/NRE deposits, it is mandatory for banks to allow premature withdrawals, if requested by depositors. However, banks are free to prescribe penal rate of interest for allowing premature withdrawal except in the case of reinvestment in term deposits with the same bank. However, premature withdrawal of large sums may impact the asset-liability management (ALM) function of banks.
Keeping this in mind, the RBI has proposed that banks will be given freedom to exercise their discretion to disallow premature withdrawal of large deposits held by entities other than individuals and Hindu undivided families. Banks would, however, have to inform such depositors of their policy of disallowing premature withdrawals in advance, i.e., at the time of accepting such deposits. In regard to existing deposits, present provision will continue until the time of renewal of individual deposits.
At present, banks are free to renew overdue domestic term deposits at an interest rate applicable on the date of maturity. In order to facilitate better ALM, it is proposed that renewal of overdue deposits at the rate of interest prevailing on the date of maturity be allowed only for an overdue period of 14 days. In case the overdue period exceeds 14 days, the deposits should be treated like term deposits and banks may prescribe their own interest rate for the overdue period. Banks, however, have to inform the depositors in advance of their policy for renewal of overdue deposits.
As per present regulations, banks are prohibited to discriminate in the matter of rates of interest paid on deposits except in respect of single term deposits exceeding Rs.1.5 million. Based on the requests received from several senior citizens and their organizations, the Reserve Bank of India has decided to permit banks to formulate fixed deposit schemes specifically meant for senior citizens, offering higher and fixed rates of interest as compared to normal deposits of any size. These schemes have also been advised to incorporate simplified procedures for automatic transfer of deposits to nominees of such depositors in the event of death.
As a step toward deregulation of interest rates and providing more operational flexibility to banks, Prime lending rate (PLR) was introduced in April 1997.
Since then, the norms relating to the operation of PLR by banks has been substantially rationalized and liberalized. Banks were given freedom to declare their own PLRs along with a maximum spread. Later, the prime term lending rate (PTLR) was introduced and subsequently banks were provided with the freedom to offer tenor-linked PLRs. Banks also have now the flexibility to offer lending rates on a fixed rate or on a floating rate basis.
At present, PLR serves as the ceiling rate for credit limits of up to Rs.200,000 and as a floor for loans or credit limits above Rs.200,000. The rationale for this policy is that PLR being the rate chargeable to the best borrower of the bank, transparency and objectivity requires that it should be the minimum rate chargeable to a borrower.
However, based on requests from the banking system, banks were given the flexibility to charge interest rates without reference to the PLR in respect of certain categories of loans/credit like discounting of bills, lending to intermediary agencies, etc., in the mid-term review of October 1999.
In recent meetings with bankers, a request was made to the Reserve Bank of India that the PLR should be converted into a reference or benchmark rate for banks rather than treating it as the minimum rate chargeable to the borrowers.
In this context, a review of the international practices by the central bank showed that while the PLR was traditionally the lowest rate charged to the prime borrowers with highest credit rating, in recent years, the practice of providing loans even below the PLR by banks has become common.
Keeping in view the international practice and to provide further operational flexibility to commercial banks in deciding their lending rates, the Reserve Bank of India, has decided to relax the requirement of PLR being the floor rate for loans above Rs.200,000.
Banks will be able to offer loans at below-PLR rates to exporters or other creditworthy borrowers including public enterprises on the lines of a transparent and objective policy approved by their boards. Banks will continue to declare the maximum spread of interest rates over PLR.
However, given the prevailing credit market in India and the need to continue with concessionality for small borrowers, the practice of treating PLR as the ceiling for loans up to Rs.200,000 will continue.
All in all, given the trying circumstances, this has been a very pragmatic credit policy. It has given a lot of “carrot” to the banks but accompanied with the “stick” in tow!
