The Hindu Business Line : A thrust on credit risk sensitivity

With a thrust on `credit risk sensitivity' and `financial stability', the emphasis of the policy is more on structural measures rather than on regular monetary instruments. With a thrust on `credit risk sensitivity' and `financial stability', the emphasis of the policy is more on structural measures rather than on regular monetary instruments.

A. K. Khandelwal

The Reserve Bank of India's (RBI) Credit Policy for 2006-07 could appropriately be described as the policy with a thrust on "credit risk sensitivity" and "financial stability". The emphasis of the policy is more on structural measures rather than regular monetary instruments.

There has been a fairly long economic expansion spanning nearly three years, which has given a major boost to consumer and business confidence. With the appropriate mix of monetary and fiscal measures, the policy-makers have contained inflationary pressures despite a sharp rise in global crude oil prices.

Swift response

Going by the overall macroeconomic scenario, the RBI has decided to keep a status quo so far as the policy rates or CRR level are concerned. At the same time, it has warned the banks and market players that there will be a swift policy response to evolving developments.

In the present policy, by keeping the benchmark rates unchanged, the central bank has prevented a general upward movement in the short- or long-term rates. But by raising the caps on NRE deposit rates or export credit rates and the risk weight on real-estate loans, it has systematically influenced the interest rates in specific segments, where an increase was warranted. Also, by not raising the benchmark rates, the RBI has protected the sentiment of traders/dealers in the money/G-Sec markets and has ensured that there will be a smooth sailing of the government market borrowings' programme in the coming quarter.

Moreover, by not reducing the CRR, the RBI has stressed that there is sufficient liquidity in the system. It has also signalled that the banks should tackle the problem of resource crunch through "mobilisation of deposits" rather than a CRR cut.

Financial stability

Though the present macro and banking scenario is positive, considerations of financial stability are equally important and, for that, the Central Monetary Authority has to look beyond the present favourable circumstances and attempt to see potential risks ahead. In the present policy, the RBI has responded to the growing risk exposures of banks in certain segments by increasing provisioning for standard advances to 1 per cent (from 0.4 per cent) for personal loans, capital market exposures, residential housing beyond Rs 20 lakh and commercial real-estate loans. Also, risk weight on exposures to commercial real estate has been increased from the present 125 per cent to 150 per cent.

Similarly, it has suggested that exposure to venture capital funds has to be treated as part of capital market exposure and it should now attract higher risk weight of 150 per cent. However, it is felt that it would be fairer if the provisioning on "real estate" is portfolio-based rather than across the board for all the banks.

Other structural measures are with respect to the markets. There is an attempt to deepen the bond/money markets by extending the NDS-OM participation to mutual, pension funds; by introducing screen-based negotiated quote-driven system for call and term-money markets and by permitting primary dealers to diversify their activities.

Rural credit

There are serious efforts to strengthen the institutional framework for rural credit. The Regional Rural Banks (RRBs) are now permitted to open/shift offices after obtaining clearance from the Empowered Committees (ECs). Also, they are given permission to conduct the foreign exchange business as limited authorised dealers (for current account transactions) on clearance by the ECs.

The policy announces a decision to set up a working group to suggest measures for assisting distressed farmers, including provision of financial counselling services and introduction of a specific Credit Guarantee Scheme under the DICGC Act for such farmers.

Moreover, there is a decision to set up a technical group to review the efficacy of the existing legislative framework governing money lending and its enforcement machinery in different States and make recommendations to State governments for improving the legal and enforcement framework in the interest of rural households.

The State-level Banking Committee conveners in all States/UTs are advised to identify at least one district in their area for achieving 100 per cent financial inclusion by providing a `no-frills' account and a general purpose credit card (GCC) on the lines of the initiative taken in Pondicherry.

To sum, the policy has focussed more on credit quality, financial stability and financial inclusion and has gone beyond the usual task of monetary management.

(The author is Chairman & Managing Director, Bank of Baroda.)