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The Rediff Business Special/ Dr Bimal Jalan

I've given sufficient time to banks to shape up'

There are no surprises in the mid-term review. We don't want the banking system to wait for announcements made on this one day and stop all their decisions as they wait for the announcement.

'There are several areas of concern in respect of current monetary trends in the economy. Money supply growth, attributable largely to the banking sector's credit to government, is too high in relation to the expected growth of the real sector. The rate of inflation is higher than initial projections. There is no denying that this is inconsistent with the objective of maintaining price stability. A case could be made out for tough monetary tightening measures.

'The debate -- at which point monetary policy must be tightened to rein in inflation -- has been going on in Europe, the US and other developed markets. We have taken a conscious step not to tighten policy. This is the main thing, but we have said that we will be watching the situation very carefully whether there will be seasonal decline in prices. We hope the inflation rate will be under control, growth will pick up and we will not have to do any of the unpleasant things.

'We will intervene at the right time, if we need to. The RBI will not hesitate to resort to further monetary tightening. We hope this will not be necessary. We hope we don't have to do any of the unpleasant things. Since industrial slowdown still persists, as far as possible nothing should be done to dampen the emerging signs of incipient recovery.

'This is a policy for greater capital adequacy for banks, stronger prudential norms to deal with the ups and downs of credit cycles and it can only strengthen the quality of balance sheets of the banks.

The structural measures regarding banks' balance sheets will have a good influence. Most of these things are planned to be introduced over a period of time. We have taken a three- to four-year perspective to implement the Narasimham Committee recommendations in terms of greater capital adequacy in order to strengthen the balance sheets of banks. These measures will only have a positive impact, and sufficient time is there for banks to plan and take measures in line with the committee recommendations and international standards.

The distance to travel is very small -- in the context of the timetable for attaining the new capital adequacy (cap-ad ratio as a percentage of ''risk assets'' will go up from eight per cent to nine per cent on March 31, 2000 and to ten per cent on March 31, 2002). Sufficient time has already been given, two and half years or so. And most banks are already at eight per cent. Hardly one bank is below eight per cent. This is more in the nature of a supplementary measure and we don't expect too much of a difficulty, but if any bank has a special problem, we will discuss it with them.

'Sufficient time has been provided to banks (to assign risk weightage to gilts). So depending on which year, how they (banks) want to spread it, banks will have to decide by which period they will implement this. So we have made no such assessment. The only assessment we have made is that it is not in terms of the financial burden it entails, as there is sufficient time. Most of things will have to be spread over at least two balance sheets.

We don't see just now that increase in money supply will fuel speculation on the currency front because measures were already taken in August. And since then, we have been managing reasonably comfortably. So we don't see any reason for any further measures now in either direction.

'The rationale for giving banks an opportunity to arbitrage with export refinance at seven per cent and repos at eight per cent is that export refinance is actually passing on the cost benefit to exporters. There may be a case wherein a bank can do such a thing, but it is a temporary affair. But since we are also taking money from banks in many other ways, if banks take advantage of this for three to four months, I am not particularly disturbed.

'Much has been said about the non-performing assets of banks. The NPA position has been improving. Provisioning has been improving. We are concerned about NPAs, make no mistake about it, and so are bankers. There are both historical and other reasons for it. On the asset side, banks have no exposure to real estate or stock markets where prices fluctuate. Their open positions are very low with regard to foreign exchange.

My effort, as I said earlier, will be to make credit and monetary policy announcements a non-event. I do not know whether I've succeeded in doing that. If I do not see any headlines tomorrow, I will have succeeded.

(An extract from Dr Bimal Jalan's comments to media-persons after announcing the policy on Friday.)

The RBI's Credit and Monetary Policy 1998-99