However, this may not be enough to encourage the setting up of new projects as a lower cost of funds is a necessary but not sufficient condition to attract investment. As long as industrial growth continues to be sluggish, investment in new projects will not be forthcoming. The RBI too has revised downwards its estimate of industrial growth by one percentage point to 8 per cent in 1997-98.
Banks
The RBI expects increase in non-food credit and investments in corporate debt to be around 20 per cent in 1997-98, given the resource availability. Banks will now be functioning in a less controlled environment which apart from affording them flexibility in operations, also imposes a higher level of risk. They will have to gear up to face this and the RBI has recommended that banks should have in place adequate safeguards for risk management.
The phased reduction in CRR requirements will infuse about Rs 9,600 crore into the banking system. Banks will be counting on higher credit offtake to absorb the excess liquidity. More so because most of the states have completed their borrowing programmes and the centre too has exhausted most of its borrowing requirements. The creating of a prime term lending rate for loans above three years will enable banks also to have a multiple lending structure, like financial institutions. Banks can now borrow up to 15 per cent of their unimpaired Tier I capital from the overseas markets and can invest a similar amount in overseas money instruments too.
New private sector banks stand to gain substantially from the policy measures. The CRR balances of these banks which were not earning any interest earlier will now get an interest of 4 per cent which will improve profitability. Moreover, as these banks are smaller in size and are also fully computerised they will be in a position to monitor their deposit base more regularly and adjust interest rates to maintain spreads.
Industry
In terms of direct benefits, the industry will benefit from the lower cost of funds due to the one percentage point cut in the bank rate to 9 per cent. The policy seeks to enhance the potential for industrial growth by making it easier for credit flow to certain industries.
Housing is one such area where it has deregulated the rates at which bank refinance is provided to housing finance companies. Also housing loans of up to Rs 5 lakh, against Rs 3 lakh earlier, for dwellings in rural and semi-urban areas will be considered as priority sector advances.
This is expect to give a boost to the housing sector which in turn will result in a demand for two key core sectors cement and steel. In automobiles, it seeks to give demand a push by making commercial vehicle financing more attractive for banks. The number of vehicles of a transporter which can be financed under priority sector lending have been increased from six to ten.
Apart from facilitating easier credit for production, the policy also recognises similar needs of the distribution and service sector. It has suggested that credit flow to the trade sector, especially the retail segment be enhanced.
How the banks will ultimately implement this remains to be see, considering the unorganised nature of this segment.
For service sectors like tourism, hotels and software projects, loan appraisals should look beyond the traditional methods based on the current ratio, considering the nature of the industry. This will be a major boost to the hotel industry which has been finding it very difficult to raise funds to implement projects.
What is disappointing is that the concessions that were being demanded by the industry for financing infrastructure projects have not come through. However, bridge loans have been brought back and this will enable projects that have got stalled/shelved due to lack of funds to commence work. The return of bridge loans will have an indirect impact on the primary markets. Investors are wary of investing in new issues as they have been duped in the past. Work can commence on projects using bridge loans. After reaching a certain stage of completion, investors will feel more comfortable investing subsequently in an issue to fund the project.
Apart from these measures there are a host of measures which make life easier for corporates.
Exporters can now retain up to 50 per cent of their exchange earnings in the EEFC account abroad.
Project exporters need no longer approach RBI for approvals for executing overseas projects which can now be processed through authorised dealers themselves. This will cut down on procedural delays.
