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No changes in bank rate, CRR, repo; RBI recommends banking reforms, warns of monetary tightening if inflation rises; Jalan foresees 'high positive growth', puts GDP at six pc

The Reserve Bank of India has made several far-reaching recommendations on the banking sector reforms on lines with the suggestions made by the second Narasimham Committee, while refraining from the usual changes in policy measures in the half-yearly monetary and credit policy mid-term review in Bombay today.

While the statement issued by the RBI governor, Dr Bimal Jalan dealt at large with the monetary and financial aspects of the economy, the central bank did not announce any changes in the short- term measures such as the bank rate, cash reserve ratio and repo rate.

Earlier, addressing chairmen and top officials of commercial banks at the RBI headquarters in Bombay, Dr Jalan said that the Indian economy will show a relatively high positive growth rate during the current financial year (1998-99) and India would be placed as one of the very few countries with such growth order in view of the global slowdown in the economic activity.

The governor said that at present the best estimates for the gross domestic product growth would be in the region of six per cent for 1998-99 as compared to 5.1 per cent in the previous year. He put agricultural growth rate at 3 per cent and industrial growth rate at over 6.5 per cent for the current year.

Expressing concern over the current rate of inflation and growing fiscal deficit, Dr Jalan said it is a matter of concern as the outlook for industrial growth continued to be uncertain and it became highly unfavourable.

''For the time being, it is not proposed to change the cash reserve ration or interest rates. The RBI will continue to manage liquidity through open market operations and repo operations. The RBI will not hesitate to resort to further monetary tightening if inflationary pressures increase or if external developments so warrant,'' Dr Jalan said in his policy statement.

Any increase in the fiscal deficit during the year would put further pressure on the outlook for medium and long term interest rates, besides adding to the already high rate of monetary growth.

It is becoming increasingly evident that a significant reduction in the fiscal deficit over the next two to three years is a high national priority. Beyond a point, it is simply not feasible for banks and financial institutions to increase the share of government securities in their overall asset portfolio without effecting their own viability and that of the productive sector of the economy.

On the Real Effective Exchange Rate of the rupee, he said the RBI would not hesitate to use its reserves to meet sharp day-to-day supply-demand imbalances in the market. ''We will ensure that lumpy and uneven demand particularly for oil imports and debt servicing obligations of the government does not cause any disturbance in the orderly functioning of the foreign exchange market. The RBI will continue to manage liquidity through open market operations and repo operations and would not hesitate to resort to further monetary tightening if inflationary pressure increases or if external developments so warrant.

The central bank proposes to continue with the flexible policy of using interest rate instruments to signal its stand regarding monetary conditions and managing flow of liquidity in the system. On implementation of the Narasimham Committee recommendations, the RBI governor said care had been taken to face them in a manner that reduces the risk exposure of banks, strengthens financial soundness and contributes to the improved profitability outlook. The RBI recognises that strengthening of capital adequacy and prudential norms could pose some immediate resource management problem in particular for some public sector banks which are constrained by legislation in their ability to raise further capital from the market.

The issue of capital support from the government and enhancing the ability of the public sector banks to access the capital market to meet their capital requirements deserves to be debated and resolved at an early date as it is central to ensuring the future financial viability of the banking sector.

Among the major recommendations on banking sector reforms, the RBI announced that the minimum capital to risk assets ratio has been raised to 9 per cent from the existing 8 per cent with effect from the year ending March 31, 2000.

The income recognition and provisioning norms on government -guaranteed advances are being brought on par with those on the other advances with effect from the financial year 2000-2001.

Provisioning on existing and old government-guaranteed advances which would consequently become Non-Performing Assets are to be fully provided for over a period of four years beginning March 31, 1999.

For announcing the inherent strength of bank balances, provisioning requirements are being introduced for standard assets, with effect from financial year ending March 31, 2000.

The bank would be permitted to achieve the said provisioning norms in two phases during the year 2000-01 and 2001-02.

By the year ending March 31, 2000, government and approved securities will have to be provided for a risk-weight of 2.5 per cent. The balance 2.5 per cent on risk-weight on such securities will be announced at a later date and additional risk weight on investment in government-guaranteed securities of government undertakings which do not form part of the market borrowing programme is also being introduced.

In order to provide sufficient time to banks to make these provisions, this requirement will come into effect from the financial year 2000-01. For outstanding stock of such securities in the portfolio as on March 31, 2000, banks will implement this decision of 10 per cent each in 2001-02 and 2002-03.

The risk-weight of government-guaranteed advances which go into default is being introduced with effect from the year ending March 31, 2000.

The RBI said the forex open position will carry 100 per cent risk-weight with effect from March 31, 1999. The central bank has advised the commercial banks to introduce effective risk management system to cover the credit risk, market risk and operational risks on a priority basis. Banks have also been advised to address market risk in a structured manner by adapting a more comprehensive asset liability management practices with effect from April 1, 1999.

On money market and government securities, the RBI has decided to withdraw the restrictions of the minimum period for ready forward repo transactions effective October 31, 1998. With a view to further deepen the money market and to enable banks, primary dealers and FIs to hedge interest rate risks, the RBI has in-principle decided to introduce facilities of interest rate swaps.

The RBI will examine, in consultation with market participants, relevant aspects such as standard documentation, back-up by underlying transaction between parties, the benchmark rate and maturity and prudential prescriptions before allowing the products in the market.

The RBI has also agreed to the Narasimham Committee's suggestion that there must be clearly defined prudent limits for banks reliance on the call money market.

UNI

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The RBI's Credit and Monetary Policy 1998-99

EXTERNAL LINK:
Statement by the RBI governor Dr Bimal Jalan on "Monetary and Credit Policy for the Second Half of 1998-99"