K V Krishnamurthy : Major Impact On Credit Offtake Unlikely

K V Krishnamurthy

CMD, Bank of India

The credit policy continues to lay emphasis on softening of interest rates, provision for adequate liquidity and to meet the credit growth, improving the credit delivery system and investment of banks, so as to impart greater flexibility to interest rate structure in the medium term. Series of measures have been announced for improvising technology and institutional infrastructure of the financial sector.

The mid-term review of monetary and credit policy for the second half of 2002-03 is line with market expectations with emphasis on structural reforms. Reduction in cash reserve ratio and bank rate was expected.

 

However, as recognised by the governor also, they are not going to have any major impact on the credit offtake from the banking system. In fact, reduction in bank and repo rates have brought them in line with comfortable liquidity in the market, which is also being reflected by continuous decline in call rates.

In the excess liquidity scenario, reduction in normal liquidity adjustment facility (LAF) will also have no impact, as banks are not utilising liquidity support from the RBI.

Further flexibility to banks in respect of interest rates is a welcome measure particularly in respect of export finance. It will enable banks to take their own view on interest rates to be charged on export credit based on commercial viability and will also promote competition among banks.

We expect this measure will be extended to pre-shipment credit up to 180 days and post-shipment credit up to 90 days. Prepayment of pre-shipment export credit from local sources including EEFC balance provides greater flexibility to the exporters, which will help them in increasing their export turn over.

Creating a level playing field among financial intermediaries has also been recognised. Accordingly, regional rural banks, local area banks and co-operative banks, which have been given discretion to pay additional interest on savings and current accounts have been encouraged to do away with such practice.

The need for broader derivative market for management of interest rate risk has been recognised. We expect that soon we will have more derivative products to manage interest rate risk in view of the increased interest rate risks for banks and corporates.

Measures have also been announced for further development of the government securities market. To impart more flexibility to the repos market, it has been proposed to permit rollover of repos using the same securities between same counter-parties.

Credit delivery mechanism for priority sector credit has been strengthened with enhanced limits. Overall we can say that the mid-term review has not sprung up any surprises and more or less on the expected lines with continuing emphasis on addressing structural issues.