Rbi Sees Gloom, Puts Banks On Reform Path

The Reserve Bank of India (RBI) has sounded warning bells on the economy in its mid-term review of monetary and credit policy for 1998-99.

The RBI has taken a serious view of an unsustainable fiscal deficit, rising inflation, slack industrial growth and an unfavourable external environment. It has threatened to tighten monetary policy if prices do not recede.

The RBI has also sought to strengthen the fragile financial system by raising the minimum capital-to-risk asset ratio from the existing 8 per cent to 9 per cent from March 31, 2000, in line with international practices.

By the year ending March 31, 2000, government/approved securities will have to be given a risk weight of 2.5 per cent. The balance 2.5 per cent risk weight on government/approved securities will be announced at a later date.

Provisions on existing and old government-guaranteed advances, which would consequently become non-performing assets, are now to be fully provided for over a period of four years, beginning March 31, 1999.

In a bid to strengthen banks' balance sheets, provisioning requirements are being introduced for standard assets from the financial year ending March 31, 2000. The time-frame for categorising an advance as doubtful debt is also being shortened .

Banks will be permitted to achieve the new provisioning norms in two phases, during the years 2000-2001 and 2001-2002.

The RBI's stance has been to aid growth by not curbing money supply despite a rise in inflation. RBI governor Bimal Jalan said, "it has to be recognised that the slowdown is still persisting, and as far as possible nothing should be done to dampen emerging signs of incipient recovery in the real sector." The governor said that if inflation does not drop, monetary tightening measures will be intiated. He, however, hoped that with the new crop and the beginning of the period of seasonal decline in prices, inflation would decelerate in the next three - four months.

He said, "A reduction in fiscal deficit over the next two to three years is now a priority. Beyond a point, it is not feasible for banks and FIs to increase the share of gilts in their asset portfolio without affectingtheir own viability and the viability of the productive sectors." RBI has "on balance of considerations, for the time being, not proposed to change the CRR or interest rates. RBI will continue to manage liquidity through open market and repo operations.

Going a step beyond the recommendations of the second Narasimham Committee on introduction of market risk on government and approved securities, an additional risk weight of 20 per cent on investments in the government guaranteed securities of PSUs, which do not form part of the market borrowing,is also being introduced.

To provide time to banks to make this provision, this requirement will come into effect in 2000. For the outstanding stock of such securities in the portfolio as on March 31, 2000, banks will implement this decision in two phases of 10 per cent each in 2001-2002 and 2002-2003. The risk weight for government guaranteed advances that go into default is being introduced from March 31, 2000. Forex open positions will carry 100 per cent risk weight from March 31, 1999.