Cash reserve ratio down by 1 pc

MUMBAI, Oct 29 (PTI) — The Reserve Bank of India (RBI) today infused Rs 7000 crore into the banking system with a 1 per cent cut in the cash reserve ratio (CRR) but indicated prime lending rates (PLR) would not be lowered by banks due to constraints faced by them.

The RBI, in its "Mid-Term Review of Monetary and Credit Policy for 1999-2000", announced withdrawal of interest rate surcharge of 30 per cent on import finance to reduce financing cost of imports for industry and granted banks the freedom to fix the interest rate on overdue export bills against the hitherto stipulation of 20 per cent interest.

The RBI increased lendable resources of banks by another Rs 1,061 crore by withdrawing incremental CRR of 10 per cent on FCNR (B) deposits beyond the level prevailing on April 11, 1997. Minimum maturity for FCNR (B) deposits has been raised to one year.

It also provided more flexibility to banks to increase the flow of credit for housing finance by treating loans up to Rs 10 lakh in urban areas and investment in bonds of the National Housing Bank and HUDCO as priority sector advances and reckoning loans to housing intermediaries as part of housing finance allocation.

Addressing chief executives of banks, the RBI Governor Dr Bimal Jalan, said banks faced constraints in greater flexibility in interest rates and stressed for the RBI, central government as well as banks granting policy prominence for undertaking concrete steps for their removal.

Decisions regarding interest rates would have to be taken by banks in the light of factors such as their own cost of funds, their transaction costs and interest rates ruling in the non-banking sector, he said.

Dr Jalan listed high non-interest operating expenses, high overhang of NPAs, interest tax, reluctance of both banks and depositors to prefer variable interest rates, substantially higher interest rates on contractual savings like Provident Fund and National Savings Scheme (NSS) and persistent and large government borrowings, as being responsible for higher lending rates.

The RBI Governor reiterated that in the interest of maintaining stable interest rate environment, the government’s borrowing programme needed to be kept within reasonable limits.

He also announced that regulation of money market mutual funds (MMMFs) would be shifted from the RBI to the Securities and Exchange Board of India (SEBI) once the latter put in place a regulatory framework. However, prior clearance of the RBI would have to be taken for undertaking MMMF activity before approaching SEBI for registration, he stated.

The RBI has lowered the prudential exposure limit in the case of individual borrowers to 20 per cent from 25 per cent of bank’s capital funds effective April 1, 2000, allowing time for excess to be reduced by October 2001.

Freedom has been accorded to banks in charging interest rate, without reference to the PLR, in respect of loans covered by refinance schemes of term lending institutions, lending to intermediary agencies, discounting of bills and advances/overdraft against deposits.

Minimum maturity of FCNR (B) deposit rates has been raised to one year from six months in keeping with the policy of minimising the country’s short-term external borrowing liabilities.

The RBI has permitted scheduled commercial banks to offer "cheque writing" facility to mutual funds dedicated to government securities (gilts) and liquid income schemes which invest at least 80 per cent of their corpus in money market instruments.

It has given NBFCs a breather by excluding their borrowings from mutual funds from the definition of public deposits.

It also stepped in to improve cash management by banks by introducing a lag of two weeks effective November 6, 1999, in the maintenance of stipulated CRR effective. The CRR cut in two phases of 0.5 per cent each is effective from November 6 and November 20.

Dwelling on the government securities (gilt) market, Dr Jalan said a working group was being constituted to analyse all related aspects of retailing gilt and make recommendations for improving the retail segment and informed a decision had been taken to publicise gilt instruments through informative pamphlets.

He said arrangements were also under consideration for the setting up of a clearing corporation, that would pave the way for opening the repo market to PSU and FI bonds held in demat form and traded in recognised stock exchanges.

Dr Jalan said a working group on deposit insurance had recommended changes in the existing changes and added that the report would be released for wider public discussion.

The RBI, meanwhile has made elaborate stand-by arrangements for the year 2000 problem (Y2K) and in order to ensure that systems failure does not affect banks' liquidity requirements, it has also provided for some interim measures in this connection.

The RBI said it had decided to introduce a special liquidity support between December 1, 1999, and January 31, 2000, to meet unforeseen liquidity demands.

Under this support banks could avail liquidity from the RBI to the extent of their excess holdings of dated government securities and treasury bills, over SLR requirements.

The rate of interest on this would be 2.5 percentage points over the bank rate.

Banks which did not have excess SLR holdings had been advised to have stand-by arrangement for liquidity support. Detailed guidelines on this would be issued later.

The RBI allowed grant of rupee loans and overdrafts to non-resident Indians (NRIs) without its approval against the security of shares and debentures or immovable properties, except for the purpose of investment.

It has granted general permission to Indian companies for issuing non-convertible debentures by way of public issue to NRIs/OCBs on repatriation basis.

Central Bank has also delegated powers to authorised dealers to permit portfolio investment by NRIs/PIOs/OCBs in shares and debentures.

The RBI also stressed on the necessity of reviewing operations of the new guidelines for infrastructure financing and said such a review would be undertaken in May, 2000.

A standing co-ordination committee under the Industrial Development Bank of India had also been set up to facilitate co-ordination and resolution of issues relating to projects financed jointly by banks and FIs.

The RBI has projected the GDP growth of 6 to 6.5 per cent, assuming that the recovery in industrial production, witnessed in the first half of the year, will gather momentum during the rest of the year and there is no unexpected setback on the agricultural front.

After a period of deceleration, there were welcome signs of a recovery in the industrial sector, the bank said.

The benchmark index of industrial production (IIP) registered a 6 per cent growth in the first five months of the current year compared to 4.2 per cent last year, it added.