Bank Credit For Firms May Be Eased

The restrictions on MPBF are currently cited as a major reason for low credit offtake by industry.

The central bank is under a lot of pressure from industry, the Indian Banks Association and the government itself to take measures to enhance credit offtake while also bringing down interest rates.

As the two objectives are often at cross-purposes, the RBI is likely to adopt other measures to tackle the situation in its busy season credit policy to be announced on October 19.

The RBI is also expected to link the administered rate of priority sector loans to the prime lending rate at about 1 per cent below it.

 

The current rate of 13 per cent for such advances between Rs 25,000 and Rs 2 lakh was fixed at a time when the PLR was 14 to 14.5 per cent. The current PLR for most nationalised banks is 16.5 per cent.

The Indian Banks Associa-tion has suggested allowing corporates with a strong asset base (current ratio of 1.33:1) to avail of the maximum permissible bank finance with no deductions for investments in shares, mutual funds and associated companies.

It also favours freeing of lending rates on advances between Rs 25,000 and Rs 2 lakh as has been done in the case of co-operative and regional rural banks.

Freeing of rates on deposits below one year and a reduction of the cash reserve ratio by 2 per cent staggered over a period of three to four months have also been suggested by IBA.

The central bank had earlier asked banks to reduce the eligible amount of bank finance of a company to the extent it has invested in associate companies, the stock market and mutual funds.

This was done to check diversion of bank funds in view of the serious liquidity crunch at that time.

The IBA says firms whose assets are 33 per cent more than their liabilities should be exempted from the norm.

We have had to reduce the fund avaiblity for some of the best corporates.This has affected bank profitablity as well, the chairman of a nationalised bank said.

There is no doubt that interest rates should come down in order to ensure a comfortable rate of industrial growth.

I am sure that credit policy will come up with signals in that direction, Indian Banks Association chairman Rashid Jilani said.

Banking circles believe the central bank might reclassify some of the priority sector advances to enable banks to charge higher interest on them.

This will ensure more focus-sed implementation of credit schemes for the very poor while asking another section to pay more.

Alhough the IBA has sought a 2 per cent cash reserve ratio (CRR) cut, it does not want the central bank to implement it all at once.

The release of Rs 8,000 crore in liquidity can put banks in a soup if it is done at one time, a senior bank executive warned.

The IBA has also indicated to the Reserve Bank that domestic savings will improve if they are allowed freedom in deciding interest rates on deposits below one year.

Allowing corporates with a strong asset base (current ratio of 1.33:1) to avail of the full MPBF with no deductions for investments in shares, mutual funds and associated companies;

Freeing lending rates on advances between Rs 25,000 and Rs 2 lakh as has been done in the case of co-operative and regional rural banks;

Freeing rates on deposits below one year;

Cutting the cash reserve ratio by 2 per cent staggered over a period of 3 to 4 months;

Spread between prime rate and non-prime rates to be fixed.