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Capital to risk assets ratio hiked to nine pc

Among the major recommendations on banking sector reforms, the RBI, in its credit and monetary policy 1998-99 mid-term review, announced that the minimum capital to risk assets ratio has been raised to nine per cent from the existing eight 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.

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, the RBI said.

On the real effective exchange rate of the rupee, Dr Jalan said that 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 II recommendations, the RBI governor said that 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, the statement said, 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.

UNI

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The RBI's Credit and Monetary Policy 1998-99