Rbi Unshackles Credit Flow

In a path-breaking and bold credit policy announced yesterday, the Reserve Bank of India abolished the consortium system of lending and the stipulated concept of maximum permissible bank finance, giving banks the freedom to determine and fund the working capital needs of borrowers.

It also cut the ceiling on interest rate on deposits of up to one year by one percentage point to nine per cent and scrapped the requirement of maintaining cash reserve ratio (CRR) and statutory liquidity ratio (SLR) on inter-bank liabilities. These measures will release Rs 3325 crore into the system. The central bank also revived the bank rate as a signalling mechanism for the banking sector, linking all its refinance and deposit rates to this new rate of 11 per cent from 12 per cent earlier. The deposit rate ceiling of upto one year has also been linked to the bank rate and will henceforth be two percentage points below bank rate.

 

While bridge finance has not been allowed, the Reserve Bank has gone to the extent of allowing banks to extend loans to corporates against shares held by them to enable them to meet the promoters contribution to the equity of new companies. Unlike bridge finance, banks will have some security against such loans under the new system, said RBI governor, C. Rangarajan.

The credit policy, according to him, has four objectives which are price stability, expanding the lendable resources of banks, smoothen the credit delivery system and better integrate the foreign exchange, government securities and money markets.

To activate the repos market, Reserve Bank has allowed repo and reverse repo transactions in all dated central government securities besides treasury bills of all maturities.

Non Bank entities who are holders of SGL accounts with the RBI are allowed to enter into reverse repo transactions with banks and primary dealers.

Freedom has also been given to banks for determining the level of credit to non banking financial companies (NBFCs) instead of restriction of upto certain multiples of their net owned funds.

Reserve Bank has however, brought back the reserve requirements on foreign currency deposits and rationalised refinance on export credit. The apex bank has also excluded bank investments in preference shares, debentures and bonds from the limit of five per cent of incremental deposits in the previous year.

Hence the five per cent limit will be applicable only to equity investments.

In the foreign exchange markets, forward cover can be booked on the basis of exposure supported by past performance and business projection without the earlier requirement of documentary evidence of a firm order or letter of credit. The forward contracts outstanding should not exceed the average turnover of the last two years. Authorised dealers are now allowed to run a swap book and offer forex rupee currency swap between two corporates without prior RBI approval.

It has imposed CRR of 10 per cent on the increase in liabilities under FCNR (B), NRNR and NRE schemes over the level as on April 11, 1997.

Main Points

CRR, SLR on inter-bank liabilities abolished

General refinance facility up to one per cent of average aggregate deposits

Deposit rates for NRE and FCNR(B) freed subject to RBI ceilings

Repo and reverse repo allowed in all dated central govt securities and T-bills

Authorised forex dealers to borrow $10 million without end use curbs and allowed to invest in overseas money markets

Forward cover for importers and exporters permitted without documentary evidence of firm orders

Banks allowed to lend freely to NBFCs

Authorised dealers allowed to offer forex rupee currency swaps

Tenure of CPs brought down from three months to 30 days

Post shipment rupee credit rate made more flexible

Line of credit to Nabard increased by Rs 200 crore

Imposition of 10 per cent CRR on FCNR (B), NRNR and NRE schemes