Financial Daily from THE HINDU group of publications
Friday, Apr 29, 2005
Money & Banking - Insight
More inward-looking than warranted
IN ITS Annual Monetary Policy Statement for 2005-06, the Reserve Bank of India has recognised the importance of a number of reform-related issues. However, the central bank somehow seems to have held itself back from full delivery on these issues. To use the ODI cricket jargon, it is almost as though RBI has preferred to play a defensive game during the slog overs, even while it has all its wickets intact.
The opportunity to de-regulate interest rates on savings bank accounts, NRI deposits, and small loans, has been given the go by.
Had such de-regulation been allowed, banks would have been able to further improve their Asset Liability Management, while savings account holders would have been rewarded with more competitive interest rates.
Then again, the Policy statement touches upon the need for change in credit delivery mechanisms, priority-sector loan eligibility, and lending rate de-regulation, but then goes no further.
Lending methods remain overwhelmingly oriented towards the manufacturing sector, though the services sector now contributes nearly twice as much to the country's GDP.
The encouragement expected for superior methods of working capital finance particularly in respect of bills of exchange (which are self-liquidating, with a clear indication of end-use and recourse to two parties, besides being legally enforceable documents in themselves) has not materialised.
The medium enterprise sector for long a major sufferer, being denied the benefits allowed to SSIs and yet being too small to enjoy the advantages available to large units has been mentioned in the Policy statement, but no specific guidelines announced to facilitate the flow of bank finance to it.
In respect of bank deposits, the focus in the statement is more on service quality issues (which are certainly required) and less on issues of safety and returns (which are arguably even more important).
Also, in respect of the call money market, it is not clear how the exclusion of mutual funds and financial institutions will really help, as it would only strengthen the position of lenders.
Potential borrowers would in any case not risk keeping large positions open with a reduction in the number of market participants.
There had also been other expectations permission for banks to trade in the interest rate derivatives market, repos in corporate bonds, re-examination of the risk weight applied to housing and other retail loans which the Policy statement does not address. However, although there are some disappointments, there are no reversals and, indeed, a large number of positive features in the Credit Policy.
Quarterly policy reviews makes sense in times of uncertainty, and provide the flexibility to make quick adjustments in the Monetary Policy.
Guidelines on mergers between private-sector banks and NBFCs do away with the earlier uncertainties that existed, underscores the need for consolidation, and encourages NBFCs to move into the mainstream.
The permission for banks to undertake commodity hedging for corporates in the international markets is a good development, as it will avoid foreign exchange outflow for margin requirements and will also provide an excellent business opportunity for banks.
The reduction in the minimum maturity period for CDs from 15 days to seven days coincides with the seven-day tenor of term deposits, helps arrest large flows of short-term money into liquid funds, and improves funds management for both banks and corporates.
The Policy statement also provides a much-needed boost to farm sector lending by banks. This sector has been undergoing a metamorphosis in India, as a result of globalisation and liberalisation.
Crop pattern, trading structures, and delivery systems have witnessed major changes. In this context, a fresh look at strategies for funding agriculture is welcome.
The focus in the Policy statement on credit delivery to SSIs is also a positive step. Although this segment has always provided a more profitable avenue for deployment of bank funds than corporate loans, an earlier problem that banks have faced in financing SSIs has been their difficulty in assessing their credit standards.
In this regard, the proposal to have CIBIL provide comprehensive credit reports on SSIs is welcome, and should go a long way in helping banks to disburse and maintain good-quality loans to SSI units.
The Credit Policy also breaks new ground in the extent of the importance it gives to customer service in banks.
The widening of the Banking Ombudsman Scheme, greater transparency and disclosure in respect of service charges, ensuring basic banking services to the common man, and so on, are important issues that credit policies in earlier years had relegated to the sidelines.
On the whole, the Policy statement is more defensive and inward-looking than the need for widespread reform now warrants. The market, certainly, had expectations of a more path-breaking policy.
At the same time, it does open several windows of opportunity for banks, and provides assurance on credit delivery and service quality issues to a greater extent than many preceding policy statements had done.
(The author is Managing Director, IndusInd Bank.)
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