P P Kadle : Short-Term Expectations Fulfilled

P P Kadle

Executive director (finance and corporate affairs)

Tata Engineering

The mid-term review has fulfilled the short-term expectations of the money markets and the industry. Some of the positive aspects of the mid-term review are:

a) The interest rate management by RBI has been excellent, signalling and managing the soft rate regime. To a certain extent, the deceleration in overall demand and dull economic scenario has also helped the RBI to maintain a low interest regime.

b) The RBI has announced the delinking of exporters loans and has allowed pre-payment/repayment of EPCs. This will provide a very good long-term incentive for the exporters. The RBI has also begun to look at enlarging the assistance to priority sector lending, by increasing the credit limits.

c) The RBI has succeeded in maintaining inflation, money supply and the exchange rates under control by constant surveillance and sound monetary policies.

Despite the above positive short-term measures, one expects the RBI to come up with some far-reaching measures with long-term impact.

The interest rate differential between the insurance and the provident fund vs. the market instruments, namely government securities/NCDs is alarming. The insurance and the provident funds account now for more than 1/3 of the private sector savings avenues, and disparity of interest rates and fixed yield commitments of these sectors will tend to polarise private savings. It is ironical that the RBI does not have the necessary powers to control the entire interest rate regime.

The RBI has adequate FX reserves. One would expect the RBI to completely do away with all the minor quantity restrictions of the current transactions of the corporate and public sector, and simplify the risk cover policies for the ECBs.

The RBI should leave the entire discipline and compliances on the current account transactions to select authorised dealers. This simplification will be a big positive signal to the new foreign corporates looking at India. This was perhaps the right time to introduce the rupee options.

The RBI has been liberalising the interest norms and the funding norms. However, nationalised banks are still adopting the age-old quantitative restrictions on lending short-term/long-term loans to corporates. If the banks have to ensure credit-worthy customers, then the RBI should ensure that the banks actually liberalise the restrictive pseudo-credit mechanisms.

The RBI shouyld take steps to actually promote the investments of banks and institutions in the capital (equity plus debt) markets. E.g. ceiling of 5% of investments can be easily increased to 15 -20 per cent.

In order to reach the credit to 2nd and 3rd level of corporates and service sectors, the RBI should take steps to deregulate restrictions on NBFCs and co-operative banks, especially in the areas of reserves to be maintained, percentage of financial assets, etc.

The NBFCs and co-operative banks are still avenues reaching the 2nd and 3rd level of service and manufacturing sectors.

The RBI has from time to time come up with brilliant comprehensive master circulars for FX transactions, NBFCs. It is now time to consider simplifying these and removing the anomalies in some major new areas like securitisation, asset restructuring etc.

It is always observed that large corporates invariably take the lead in creating capacities and investments in many pioneering fields. The current single borrower and group borrower limits are one of the biggest impediments for the top 100 companies. These limits could be removed for new projects and infrastructure creation.

Summing up, one gets an impression that the RBI has been moving towards a more liberalised economy with a slow but sure approach. It is time now to take a major leap.