Structural Reforms Pivotal Now

Guneet Chadha, Managing Director, IDBI Bank

The busy season credit policy announced by Bimal Jalan can be summed up in a word as most pragmatic, addressing both the short and medium term needs of industry and the financial system.

As a first step, the governor addressed the immediate need of industry by announcing a cut in bank rate by 50 bp from 7.0 per cent to 6.5 per cent along with a sharp cut of 200 basis points in cash reserve ratio (CRR) requirements of banks from 7.5 per cent to 5.5 per cent, in two phases.

These cuts need to viewed in the context of a slowing economy especially in the six infrastructure industries, that is, electricity, coal, petroleum, refinery products, cement and steel.

The severe global slowdown has only aggravated the need to pump prime the economy. While fiscal slippage continues to remain a concern for the RBI in the management of its monetary policy, the subdued inflationary conditions gave the RBI adequate elbow room to lower the rates.

Whilst signalling lower interest rates the governor has also clearly spelt out the short term nature of monetary policy measures and the need to be alert to any possible changes in the environment.

The RBI, by cutting CRR by 200 basis points, has made available an incremental Rs. 8000 crore for lending through the banking system.

The RBI on its part has clearly and forcefully created an enabling environment for industrial revival. The success of these measures will however also depend on further structural reforms and corrections that will be necessary to give an impetus to industrial growth and activity.

The other structural impediments in the form of capacity overhang, productivity will continue to depress the investment climate for a while before the full impact of these rate cuts start having the desired effects on the economy.

Secondly with a medium term perspective, the governor also highlighted some changes that are required for the continued health of the financial system and improve its functioning.

The apex bank has over the past year repeatedly raised concerns over the inadequacy of credit controls in assessing and investing through the private placement route.

The RBI is only guiding the banks to ensure that there are adequate controls to ensure control on the quality of the asset portfolio of banks. The revised guidelines will help towards reducing the possibility of assets of suspect quality entering banks books through the back door.

The steps announced in activating the Credit Information Bureau, the setting up of which was announced in the last monetary and credit policy, will further create the infrastructure to manage and assess credit more efficiently by collection and dissemination of information on defaulters.

On the external front, the situation remains comfortable, though Jalan continued to stress the need for continued vigilance.

The excessively large exposure, among some corporates, to movement in foreign exchange markets and the need to evaluate these risks while assessing the potential risks on borrowers balance sheets was once again highlighted in the policy announcements.

The continued slowdown in global economies and the consequent adverse impact on the countries balance of payments situation might warrant a need to monitor these exposures even more closely going forward.

Low rate regime on

Adesh Gupta, President & CFO Indian Rayon & Industries

Overall, the credit policy has been good. It continued to have focus on structural changes in interest rates regime, which are consistent with the apex bank