Nationalised Banks To Continue With Mpbf Formula

MOST NATIONALISED banks plan to stick largely to the current system of fixing maximum permissible bank finance (MPBF) for corporates even if it is abolished in the forthcoming slack season credit policy, to be announced on April 15.

The banking sector expects the Reserve Bank of India to abolish MPBF in order to provide greater operational freedom to banks. But bank officials feel that the freedom will be used only in special cases where a company may seem to deserve a higher level of credit than what can be permitted under MPBF. The freedom is in itself very important. It will leave no room for being accused of violating RBI guidelines in cases where we feel that a company deserves a higher level of funding, said the chairman of a nationalised bank. Asked about the effect of political instability on the credit policy, banking circles said the RBI would go ahead with its planned policy without any change in the existing draft.

In any case, the likely announcements in the credit policy are not such that they will affect the political situation, said a bank chief.

The banking sector also expects the central bank to abolish the cash reserve ratio on inter-bank transactions in order to reduce the cost of money for banks and ultimately for customers.

The central bank might also step in to remove some of the hurdles inherent in the loans given out of foreign currency non-resident Indians (bank) or FCNR (B) deposit accounts. Banks have not been able to improve lending on this count because of procedural problems.

Bank chiefs are, however, hopeful that the RBI will lower the rate of interest on one-year deposits or remove interest rate control altogether. This deposit portfolio is the only one which has an administered rate, with banks not being permitted to offer more than 11 per cent interest on this deposit portfolio.

On the other hand, financial institutions are expecting the central bank to allow them to raise short term deposits. They hope that short term deposits at lower prices will bring down the overall cost of funds and enable them to offer loans at a lower rate of interest.

The RBI might also come up with an indication that the banks should bring down the prime lending rate. It would certainly like to push banks into extending more credit to the industrial sector, said a senior bank official.

The RBI is under pressure from the export sector to lower the interest rate on export credit in rupees, which is currently 13 per cent. But it will be difficult for the central bank to do so because banks are already functioning under a burden of extremely low spreads on this portfolio.

Mercifully for the banks, the offtake of export credit is not enough to exert pressure on their balance sheets.

Banks are expected to extend 12 per cent of their total lending portfolio to the export sector. But several banks have not been able to fulfil this criteria because of low offtake.