Business Daily from THE HINDU group of publications
Wednesday, Nov 01, 2006
Money & Banking - Insight
Complements fiscal policy
M. V. Nair
In the Credit Policy review, the RBI Governor, Dr Y. V. Reddy, has considered all issues and concerns on broad money growth and inflation, GDP growth and net bank credit expansion, inflation and exchange rates and reserves, contribution to GDP from industrial production, services and agricultural sector, and infrastructure growth. Economic growth momentum is to be sustained and genuine needs of bank credit to different sectors are to be maintained through well-apportioned credit dispensation from the banking system.
The key message to banks is also to manage their liquidity by matching resources and deployments as the repo rate increase by 25 basis points points out.
On borrowing limit
The RBI's decision to increase the borrowing limit from 25 per cent to 50 per cent of unimpaired Tier I capital will provide banks competitively priced funding and also add to liquidity. This will increase the banks lendable funds.
Similarly the FII investment in government securities being raised in a phased manner to $3.2 billion by March 31,2007, compared to existing limit of $2 billion, will also improve the flow of foreign funds and improve liquidity in the market besides giving momentum to the debt market.
The financial inclusion policy certainly gets a boost as the small accounts are exempted from detailed KYC compliance.
The forward contract cancellation limit being increased from 25 per cent to 50 per cent addresses the long-standing demand of exporters and importers.
The exemption from lock-in period for remittances of sales proceeds of immoveable property from NRO accounts will improve the inflow of non-resident money into the real-estate sector. This will especially be helpful to the small NRI investor as this is applicable to amounts not exceeding $1 million per financial year.
Basel II compliance
After assessing the level of preparedness of the banks to migrate to the Basel II framework, the RBI has permitted one/two-year time. The banks will naturally seize the opportunity to prepare themselves better and ensure compliance. Banks will stand to gain from the global experience on compliance to Basel II in this extended time frame.
The selective extension of "when issued" trading to fresh issue of central government securities will provide more depth to the debt market. Primary dealers and banks are also being permitted to cover the short position in Central government securities within an extended period of five trading days compared to same-day delivery and this delivery is also possible through shorting a security through repo route. This will improve the trading volume in the debt market.
The removal of restrictions on the number of tie-ups by banks with exchange houses and also the number of drawee branches for rupee drawing arrangements will address the need of the expatriates, especially middle- and low-income group, for remittance to distant places.
Banks fee income gets an additional avenue through the Guarantees and L/Cs for services' import up to $1,00,000 covering direct contractual liability between residents and non-residents.
About the overheated economic condition, the RBI Governor has flagged issues of "demand pressures" and "possible transient supply constraints in respect of primary commodities." A careful and cautious banker, Dr Reddy has advised, should be watchful of the "evolving circumstances."
On the whole, the sustenance of growth momentum is the focus and concern of all market participants, bankers and regulator as well.
(The author is Chairman and Managing Director, Union Bank of India.)
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