Banks need to focus on deposit mopup

MONETARY POLICY MID-TERM REVIEW 2006-07

VIEWPOINT: M Balachandran, CMD, Bank of India.

The Reserve Bank of India has raised the repo rate, the rate at which it will lend funds to bank, by 25 basis points, to 7.25 per cent, making the borrowing under Liquidity Adjustment facility window dearer. As a consequence banks will have to calibrate the credit expansion plans based on the deposit accretion.

Banking entities cannot look upon the LAF and CBLO to raise resources for credit disbursals. Banks will have to concentrate on deposit mobilisation more and also rationalise lending activity to ensure that productive sectors such as manufacturing (capital investment), SME and agriculture gets adequate allocation.

RBI is not against lending to any specific segment (like housing). The governor's concern is the economy should not get overheated through rally in the credit expansion.

The breathing space (two years) for banks to implement Basel II norms will provide time to develop credit monitoring, risk management system and data base of operational risk.

Many banks are yet to rollout Core banking solution in substantial manner which is necessary for collating data from branches for risk management and implementing basel II norms. While most banks will get two years till March 2009, Bank of India with extensive overseas branch network will only get one year (till March 2008).

The increased limit on borrowing funds from overseas branches and correspondent banks to 50 per cent to unimpaired tier I capital from earlier ceiling 25 per cent of tier I capital will provide more flexibility to raise funds abroad.

Inflation is under control as of now and RBI has kept the target to contain it within 5.0-5.5 per cent for 2006-07.

At present, the inflation measured by wholesale price index is ruling above 5.10 per cent. The rise in prices of food items has contributed maximum to inflation.