Consortium Lending Rules To Be Eased

Rangarajan has also indicated that action will be taken against banks failing to fulfil the target of providing 12 per cent of their net bank credit to the export sector. The action could "take the form of the shortfall being kept with certain other institutions", he said in an interview with Business Standard. At present, banks are required to deposit an amount equivalent to the extent of the shortfall in priority sector lending with Nabard.

The Governor maintained that the monetary policy he announced a fortnight ago was not a break from the past. "It is a continuation of the policy that we started in the latter half of 1995-96," he said. He, however, categorically rejected the suggestion that lack of credit was responsible for a slowdown in industrial production.

 

"The argument that the high cost and lack of credit has brought about the recessionary tendencies has not been borne out by facts. The slowdown in industrial growth is more due to factors like the decline in electricity growth and mining. The manufacturing sector has done well," he said.

Dr Rangarajan was happy that the busy season monetary policy had brought about the right results. Referring to the cut in interest rates announced by several banks, he said: "These are good signals, picked up by the banks as well as the financial institutions."

He said bankers have to draw the line properly between being discriminating and being withdrawn.

"With the reduction in interest rates, I think borrowers will be more interested in going to the banking system to get credit instead of raising funds through bonds. I think there will be a pick-up in credit," he said.

The Governor, however, quickly pointed out that the RBI's concern now was to keep the money supply growth in view since the policy had resulted in the lowering of interest rates and expansion of lendable resources.

Dr Rangarajan was confident that there would be no upward pressure on interest rates with the bulk of the government borrowing programme having been completed. But as a general proposition, he admitted that there was the need to bring down fiscal deficit so that the government would have to borrow less.

On the external sector front, the Governor was bullish with the foreign currency assets crossing the $19-billion mark. He was confident that the current account deficit would "certainly not higher" than the anticipated two per cent of GDP. He attributed the rise in assets to a slowdown in imports and an increase in portfolio investments by foreign institutional investors.

He justified the accretion in foreign currency assets. "We are essentially building a position, so that if there are outflows in January because of repayments of the India Development Bonds, we will not be put under any strain," he said.

According to him, the remaining task in the banking sector was to improve the organisational effectiveness of banks to increase their productivity so that the efficiency gains of reforms are passed on to the people.