The policy documents of the
Reserve Bank capture the rationale of monetary, structural and prudential measures
introduced from time to time against the background of an assessment of macroeconomic
and monetary developments. In the process, the approach of greater transparency
and better communication contributes towards an effective consultation process
in policy making. This Statement on Mid-term Review of the Annual Policy for
the year 2004-05 follows the pattern already set in the previous years. It consists
of three parts:
(I) Mid-term Review of Macroeconomic
and Monetary Developments in 2004-05;
(II) Stance of Monetary Policy
for the Second Half of 2004-05; and
(III) Financial Sector Reforms
and Monetary Policy Measures.
I. Mid-term Review of Macroeconomic
and Monetary Developments in 2004-05
Domestic Developments
2. The annual policy Statement
released on May 18, 2004 projected real GDP growth for 2004-05 in the range
of 6.5-7.0 per cent on the assumption of normal monsoon, sustained growth of
the industrial sector and good performance of exports. As per the India Meteorological
Department (IMD), the South-West monsoon rainfall has been 87 per cent of its
long period average. Rainfall was normal in 23 out of 36 meteorological sub-divisions
of the country, but it was deficient in the remaining 13 sub-divisions. Output
of major Kharif crops this year may be lower than their corresponding
levels last year. It is, however, anticipated that Rabi crops would be
favourable. While the prospects are still somewhat unclear, the current assessments
clearly indicate that agricultural growth of 3.0 per cent, projected earlier,
will not materialise.
3. There are indications that
the prospects for growth in industrial output have improved. The index of industrial
production (IIP) increased by 7.9 per cent during April-August 2004 as compared
with the increase of 5.9 per cent in the corresponding period of the previous
year. There are signs of sustained growth in the production of basic goods,
capital goods, intermediate goods and consumer durables. The index of six major
infrastructure industries increased by 5.6 per cent during April-August 2004
as compared with the increase of 4.2 per cent in the corresponding period of
the previous year. Further, India's exports continue to remain buoyant. Exports
increased by 24.4 per cent in US dollar terms during April-September 2004 as
against 8.1 per cent in the corresponding period of the previous year.
4. According to the revised
estimates by the Central Statistical Organisation (CSO), real GDP increased
by 8.2 per cent during 2003-04 as against 4.0 per cent during 2002-03. The data
available for the first quarter of 2004-05 show that real GDP increased by 7.4
per cent as against 5.3 per cent in the first quarter of the previous year.
While the CSO estimate of GDP for the first quarter is consistent with the earlier
projected growth of 6.5-7.0 per cent for the full fiscal year, the deficient
rainfall in some parts of the country and its impact on Kharif crop impart
a downward bias to this growth projection. In addition, the higher oil prices
tend to have an adverse impact on GDP growth. At the same time, the improved
prospects for growth in industrial output and continued buoyancy in exports
are likely to have a positive impact on growth. On the whole, while the picture
is not very clear, it may be reasonable to place the overall GDP growth for
the year 2004-05 in the range of 6.0 to 6.5 per cent as against the earlier
expectation of 6.5-7.0 per cent, assuming that the combined downside risks of
high and uncertain oil prices, and sudden changes in international liquidity
environment remain manageable. India would thus remain among the faster growing
economies in the world in 2004-05.
5. Various business expectation
surveys including RBI’s own assessment point to a reasonable air of optimism
regarding growth. The corporate results continue to be good and cash flows so
generated may get translated into higher investment. Non-food credit growth
remains strong. Private corporate investments are expected to be higher. The
overall economic environment remains supportive of investment and capacity building,
given the economy’s resilience to withstand shocks. While exports of services
remain buoyant, there is growing confidence for exporting manufactured goods.
There is significant acceleration in international business and investor confidence
in India.
6. During 2004-05, scheduled
commercial banks’ credit increased by 11.3 per cent (Rs.95,120 crore) up to
October 1, 2004 which was substantially higher than the increase of 4.0 per
cent (Rs.28,927 crore) in the corresponding period of last year. Food credit
increased by Rs.2,677 crore as against a decline of Rs.12,107 crore in the previous
year reflecting a turn-around of about Rs.14,800 crore. Non-food credit posted
a robust increase of 11.5 per cent (Rs.92,443 crore) as compared with an increase
of 6.0 per cent (Rs.41,034 crore) in the corresponding period of the previous
year. The incremental non-food credit-deposit ratio was as high as 96 per cent
as against 38 per cent in the corresponding period of the previous year.
7. In the recent years, the
impetus to credit growth has emanated from non-agriculture non-industrial sectors,
particularly, housing, small transport operators and retail loans. The detailed
information on sectoral deployment of credit available from banks reveals that
over two-thirds of credit flow during the current financial year (up to August
2004) have been on account of retail, housing and other priority sector loans.
More recent information available up to September 2004 points to a revival of
industrial credit. Among industries, discernible increase is observed in petroleum,
infrastructure, electricity, construction, metal & metal products, drugs
& pharmaceuticals, gems & jewellery and automobiles.
8. While credit expanded, scheduled
commercial banks’ investments in bonds/debentures/shares of public sector undertakings
and private corporate sector, commercial paper (CP) etc., declined by 4.8 per
cent (Rs.4,255 crore) up to October 1, 2004 as compared with a decline of 1.1
per cent (Rs.1,043 crore). Notwithstanding the decline in such investments,
the total flow of resources from scheduled commercial banks to the commercial
sector increased substantially by 9.9 per cent (Rs.88,188 crore) up to October
1, 2004 as compared with the increase of Rs.39,991 crore in the corresponding
period of the previous year. The year-on-year growth in resource flow was also
higher at 20.9 per cent as against 14.3 per cent a year ago. Scheduled commercial
banks’ investments in instruments issued by financial institutions (FIs) and
mutual funds this year declined by Rs.2,570 crore as against an increase of
Rs.6,204 crore in the previous year. The total flow of resources to the commercial
sector including capital issues, global depository receipts (GDRs)/american
depository receipts (ADRs) and borrowings from banks and FIs increased by Rs.1,08,510
crore up to October 1, 2004 as compared with Rs.66,863 crore in the corresponding
period of the previous year.
9. In the current financial
year up to October 1, 2004, money supply (M3) increased by 5.4 per
cent (Rs.1,07,657 crore) as compared with 7.8 per cent (Rs.1,33,901 crore) in
the corresponding period of the previous year. On an annual basis, growth in
M3 at 14.0 per cent was, however, higher than 11.9 per cent in the
previous year. Aggregate deposits of scheduled commercial banks rose by 6.4
per cent (Rs.96,598 crore) as compared with an increase of 8.3 per cent (Rs.1,06,782
crore) in the corresponding period of the previous year. The lower deposit growth
this year could be mainly attributed to reduction in non-resident Indian (NRI)
deposits with the banking system. On an annual basis, the growth in aggregate
deposits at 15.4 per cent was, however, higher than that of 11.7 per cent a
year ago. Overall, while M3 growth has reverted from its peak level
of 16.2 per cent at the beginning of the year to a level envisaged in the annual
policy Statement, the possibility of a higher M3 growth in the event
of continued strong credit growth and overhang of liquidity cannot altogether
be ruled out.
10. Reserve money increased
by 0.6 per cent (Rs.2,535 crore) in the current financial year up to October
15, 2004 as compared with an increase of 0.9 per cent (Rs.3,216 crore) in the
corresponding period of the previous year. While currency in circulation increased
by 4.3 per cent (Rs.14,036 crore) as compared with 6.6 per cent (Rs.18,758 crore)
in the corresponding period of the previous year, bankers’ deposits with RBI
decreased by 12.4 per cent (Rs.12,930 crore) as compared with an increase of
18.9 per cent (Rs.15,763 crore). As regards the sources of reserve money, net
RBI credit to the Central Government declined by Rs.21,395 crore as compared
with a decline of Rs.53,466 crore in the corresponding period of the previous
year. On the other hand, RBI’s net foreign currency assets (adjusted for revaluation),
increased by Rs.30,604 crore on top of an increase of Rs.62,945 crore during
the corresponding period of the previous year.
RBI’s credit to banks and commercial sector
continued to decline because of reduced reliance on the standing facilities
on account of comfortable liquidity conditions. The year-on-year increase in
reserve money was 17.9 per cent as on October 15, 2004 as compared with 10.9
per cent a year ago.
11. Annual inflation, as measured
by variations in the wholesale price index (WPI), on a point-to-point basis,
rose from 4.6 per cent at end-March to 8.3 per cent by end-August 2004. It has
since come down to 7.1 per cent by October 9, 2004. On an average basis, annual
inflation based on WPI was 6.2 per cent as on October 9, 2004 as compared with
4.9 per cent a year ago. At a disaggregated level, prices of primary articles
(weight: 22.0 per cent) increased by 4.3 per cent, the same rate as in the previous
year. Among primary articles, high increase in prices was observed mainly for
iron ore, tea and oilseeds. Similarly, increase in prices of ‘fuel, power, light
and lubricants’ group (weight: 14.2 per cent) at 10.7 per cent was higher
than that of 5.7 per cent during the corresponding period of last year. Among
‘fuel, power, light and lubricants’, increase in prices was across the board
- in coal, petrol, diesel, aviation turbine fuel and naptha. Prices of
manufactured products (weight: 63.7 per cent) increased by 7.1 per cent as compared
with 5.1 per cent last year. Among manufactured products, a significant increase
in prices was observed in basic metals & alloys, non-metallic mineral products
and non-electrical machinery.
12. In order to isolate the
impact of supply shock, a contextual analysis of WPI reveals that as on October
9, 2004, the annual price increases were relatively high in the case of four
commodities which have a combined weight of 12.6 per cent in WPI: iron ore (290.0
per cent), iron & steel (26.5 per cent), mineral oils (16.8 per cent) and
coal mining (16.2 per cent). Excluding these four items, the WPI inflation rate
works out to 4.2 per cent as on October 9, 2004, on a point-to-point basis,
as against 3.8 per cent in the previous year.
13. In the international oil
markets, Brent, WTI and Dubai Fateh varieties have recorded average prices of
US $ 49.7, US $ 53.1 and US $ 38.7 per barrel in October (up to October 22),
registering increases of about 66.0 per cent, 65.3 per cent and 40.0 per cent,
respectively, since January and 47.1 per cent, 44.5 per cent and 28.5 per cent,
respectively, since April 2004. Subsequent to the increase in imported crude
prices, domestic petro-product prices have been raised, though not as sharply.
Since January 2004, domestic diesel and petrol prices (average of prices in
four metros) have gone up by about 13.4 per cent and 10.5 per cent, respectively.
However, the pass through of crude oil prices is still to be completed and is
likely to remain the most critical factor influencing the domestic inflation
in the medium-term.
14. Internal exercises suggest
that in the absence of policy intervention, every US dollar increase in crude
oil prices could potentially add 15 basis points to WPI inflation as a direct
effect and another 15 basis points as indirect effect. In the hypothetical situation
of passing on the entire increase in international oil prices since January
to the domestic customers, the mineral oils price index would have registered
an annual increase of about 27 per cent by October 9, 2004 as against the actual
increase of about 17 per cent. As a result, the headline inflation which is
presently at 7.1 per cent would have increased by another 1.1 percentage points
due to the direct impact and further by 1.1 percentage points, with a lag, due
to indirect impact. The impact of higher international oil prices has been partly
cushioned by fiscal measures such as cuts in excise and customs duties. It may
not be inappropriate to assume that similar burden sharing will continue to
enable moderation of the incidence of oil price shocks in future, recognising
that headroom available for absorbing the burden both by fisc and oil companies
gets progressively reduced.
15. It may be recalled that
the annual policy Statement had assumed the annual inflation rate at around
5.0 per cent by the end of 2004-05, on the basis of point-to-point variation
in WPI. This projection was made at a time when IMD had predicted a normal monsoon
for the current year. The Statement had drawn attention to the underlying risks
to inflation emanating from international oil and commodity prices given the
pass through of international prices to domestic inflation. The Statement had
also cautioned about the potential inflationary impact of persistence of excess
liquidity on aggregate demand. In retrospect, the magnitude and persistence
of supply shocks was beyond what was anticipated by many. While there are uncertainties
regarding the future course of international commodity prices, particularly
oil prices, it is now clear that the year-end inflation projection will exceed
what was anticipated at the beginning of the financial year. On current assessment,
assuming that there would be no further major supply shock and liquidity conditions
remain manageable, the point-to-point year-end inflation based on WPI for the
year 2004-05 could be placed around 6.5 per cent.
16. Annual inflation, as measured
by variations in the consumer price index (CPI) for industrial workers, on a
point-to-point basis, was 4.6 per cent in August 2004 as against 3.1 per cent
a year ago. On an annual average basis, inflation as reflected in CPI was 3.4
per cent in August 2004 as against 4.0 per cent a year ago.
17. During the current year,
the CPI inflation has remained significantly lower than WPI inflation. While
this could largely be attributed to the difference in coverage, the pass through
effect of international prices has considerably weakened the association between
the two inflation rates. The CPI inflation has been lower than the WPI inflation
in the recent past reflecting lower increase in prices of food items. On the
other hand, prices of certain industrial raw materials and manufactured products
which rose sharply, do not get reflected in CPI basket directly. However, CPI
inflation could be impacted by WPI inflation with a lag.
18. The Union Budget for 2004-05
placed the net and gross market borrowings of the Central Government
at Rs.90,365 crore and Rs.1,50,817 crore, respectively. The Central Government
completed net market borrowings of Rs.26,233 crore (29.0 per cent of the budgeted
amount) and gross market borrowings of Rs.75,044 crore (49.8 per cent of the
budgeted amount) up to October 21, 2004. Taking into account the receipts from
states under the debt-swap scheme, the market borrowing programme as per the
indicative calendar of the Central Government for the second half of 2004-05
was reduced. The weighted average yield on government borrowings through dated
securities at 5.76 per cent this year so far (up to October 21, 2004) has been
lower than 5.90 per cent last year. The lower cost of government borrowings
so far this year could be attributed to two interrelated factors: First, lower
volume of first half borrowings than usual on account of carry forward of surplus
cash balance of Rs.26,669 crore at end-March 2004 into this year, reduced the
borrowing requirements. Second, proportionately higher subscription emanated
from market participants other than the traditional source of banks. While the
Government could borrow at a lower cost so far, keeping in view larger than
usual borrowing slated for the second half of the year, the market borrowing
programme in the remainder of the year needs to be calibrated carefully in view
of strong credit demand. It is, therefore, critical to ensure that there is
no slippage in fiscal deficit.
19. Revenue deficit of the Central
Government at Rs.62,906 crore was higher by about 3.5 per cent by August 2004
over the corresponding period of last year and accounted for about 82.6 per
cent of the budget estimate for the whole year. The gross fiscal deficit of
the Central Government at Rs.52,509 crore up to August 2004 was higher by about
20.8 per cent over the corresponding period of last year and constituted 38.2
per cent of the budget estimate for the current year. The state governments
have prepaid Rs.13,781 crore of central government debt through additional market
borrowings under the debt swap scheme. Such market borrowings by the state governments
were in addition to the normal market borrowings of Rs.9,362 crore (up to October
21, 2004). Further, the states have prepaid to the Centre from their small savings
collection.
20. In the recent period, there
have been some instances of under-subscription to the state government issues
despite easy liquidity conditions. This inadequate response on the part of the
market participants once again underlines the need for prudent fiscal management
at the state level to ensure completion of the approved borrowings of the state
governments. In this context, the persistence of large aggregate borrowing of
the Central and state governments continues to be a matter of concern in terms
of its possible adverse impact on the desired acceleration in growth that is
consistent with stability, as also from the point of view of ensuring efficient
monetary and debt management. Nevertheless, there have been certain positive
developments in this regard which could moderate the complexities in the medium-term.
First, there were efforts towards framing of draft model of fiscal responsibility
legislation at the state level. Five states have already enacted fiscal responsibility
legislation and a few others are in the process of doing so. Second, the Central
Government has also framed the Fiscal Responsibility and Budget Management (FRBM)
Rules, effective July 5, 2004, unveiling the road map for fiscal consolidation.
21. In recent years, scheduled
commercial banks' investment in government and other approved securities has
been much in excess of the required statutory liquidity ratio (SLR) of 25 per
cent. As at end-March 2004, such excess SLR securities at Rs.2,67,328 crore
constituted 16.3 per cent of net demand and time liabilities (NDTL) of banks.
However, during the current year, scheduled commercial banks’ investment in
government and other approved securities at Rs.27,435 crore (up to October 1,
2004) was lower than that of Rs.76,705 crore in the corresponding period of
the previous year partly on account of pick-up in credit demand. Consequently,
commercial banks’ excess holding of SLR securities was reduced to Rs.2,61,299
crore or 14.7 per cent of NDTL. Notwithstanding this reduction, the effective
SLR investment at 39.7 per cent of NDTL for the banking system as a whole, continues
to be high relative to the statutory minimum of 25 per cent. As credit demand
is expected to remain buoyant this year, lower appetite for SLR securities has
implications for government borrowings in an environment of market determined
interest rates.
22. As indicated in the annual
policy Statement, the market stabilisation scheme (MSS) was introduced to absorb
liquidity of a more enduring nature by way of sterilisation through issuances
of Treasury Bills/dated government securities. During 2004-05, liquidity absorption
through MSS was Rs.54,146 crore up to October 21, 2004. With the issuance of
MSS, the repo volumes tendered under liquidity adjustment facility (LAF) declined
from an average of Rs.70,523 crore in April to Rs.13,805 crore in October 2004
(up to October 21). The liquidity that remained sterilised declined from an
average of about Rs.81,260 crore in April to Rs.67,321 crore in October (up
to October 21). In addition to MSS and repo, surplus balances in the Central
Government account with the Reserve Bank also helped in sterilising excess liquidity
from time to time. Notwithstanding some decline in surplus liquidity during
the year, the overhang of liquidity continues to remain substantial.
23. During 2004-05 (April to
October 21, 2004), financial markets have remained generally stable though interest
rates have displayed some upward movement, particularly at the longer end. First,
the average call money rate increased from 4.29 per cent to 4.57 per cent. Second,
the 91-day and the 364-day Treasury Bill rates moved up from 4.42 per cent and
4.45 per cent to 5.20 per cent and 5.49 per cent, respectively. Third, the yield
on government securities with 1-year residual maturity increased from 4.51 per
cent to 5.51 per cent. Fourth, the yield on government securities with 10-year
and 20-year residual maturities increased from 5.14 per cent and 5.76 per cent
to 6.72 per cent and 7.16 per cent, respectively. As a result, the spread between
10-year and 1-year government securities moved up from 63 basis points to 121
basis points. Similarly, the spread between 20-year and 1-year government securities
increased from 125 basis points to 165 basis points.
24. The weighted average discount
rate on commercial paper (CP) of 61 to 90-day maturity increased from 5.08 per
cent in April to 5.12 per cent by mid-October 2004. The market repo rate increased
from 3.70 per cent to 4.52 per cent with an increase in daily volume from Rs.5,065
crore (one leg) to Rs. 5,587 crore. The average daily volume of CBLO (collateralised
borrowing and lending obligation) increased significantly from Rs.2,500 crore
to Rs.8,736 crore with an increase in CBLO rate from 3.8 per cent to 4.51 per
cent. The typical interest rate on 3-month certificates of deposit (CD) increased
from 4.45 per cent in April to 5.25 per cent by October 2004. However, public
sector banks reduced their rates for deposits of over 1-year from a range of
5.0-6.0 per cent to 4.75-5.75 per cent.
25. As indicated in the annual
policy Statement, commercial banks have announced their benchmark prime lending
rates (BPLRs) as advised by the Indian Banks' Association (IBA). The new system
of BPLR imparts greater transparency in determination of lending rates while
giving complete flexibility to banks to price their loan products either on
fixed or floating basis. The BPLRs of public sector and foreign banks remained
unchanged in the range of 10.25-11.50 per cent and 11.00-14.85 per cent, respectively,
during April-September 2004. The BPLRs for private sector banks, however, moved
from a range of 10.50-13.00 per cent in April to a range of 9.75-13.00 per cent
by September 2004. The representative (median) lending rates on demand and term
loans (at which maximum business is contracted) of public sector banks were
in the range of 10.50-12.75 per cent in June as against 11.0-12.75 per cent
in March 2004.
26. The risk premium on private
sector bonds, as measured by the yield spread between highly rated corporate
paper and government securities, has reduced. For example, the spread between
AAA-rated corporate bonds of 5 years and the yield on government securities
of similar maturity declined from about 80 basis points in April to about 50
basis points by October 2004.
27. The Reserve Bank has been
persistently drawing attention of banks to interest rate risks. Accordingly,
banks were advised in January 2002 to build-up investment fluctuation reserve
(IFR) to a minimum of 5.0 per cent of their investment portfolio. As at end-March
2004, banks had built up IFR up to 3.0 per cent. With the recent trend in interest
rates, some of the risks have crystallised. However, there has been some cushion
for banks given the conservative accounting norms which do not permit banks
to recognise unrealised gains in their portfolio, while requiring them to provide
for any known depreciation in their value. Against this background and pending
a review of existing guidelines on banks’ investment portfolio, RBI allowed
banks to exceed the ceiling of 25 per cent of investments included under HTM
category by shifting some of their investments in SLR securities from the HFT/AFS
categories to HTM category at the lowest of the acquisition cost or prevailing
market value or book value, subject to a maximum of 25 per cent SLR securities
to be held in HTM. Consistent with international standards that do not place
any cap on HTM category, such a move was considered advisable taking into account
the statutory nature of the 25 per cent SLR while ensuring prudence and transparency
in valuation on transfer to HTM. While the earlier prescription was relatively
more conservative, the recent changes recognised the dynamic interface with
the interest rate cycles. While RBI recognises the need for continuing to build
up IFR, banks were advised to prepare themselves to implement the capital charge
for market risk as envisaged under Basel II norms in a phased manner by end-March
2006.
External Developments
28. The International Monetary
Fund (IMF) in September 2004 projected world output to grow by 5.0 per cent
in 2004 and 4.3 per cent in 2005. Global recovery is backed by world trade that
has been projected by the IMF to grow in volume terms by 8.8 per cent in 2004
and 7.2 per cent in 2005. However, the downside risks have increased primarily
on account of persistence of uptrend in global oil prices.
29. With the ongoing growth
rebound, the US Fed has started moving monetary policy to its neutral level
by raising the overnight target policy rate thrice by 25 basis points each since
June to 1.75 per cent by September 2004. Bank of England has raised its policy
rate by 125 basis points in stages since November 2003 to 4.75 per cent by August
2004, largely on account of domestic concerns on asset price inflation. Similarly,
central banks in other countries such as Hong Kong SAR, Mexico, Poland, Russia,
Singapore, Switzerland and Thailand have raised policy rates during 2004. In
euro area, growth has been relatively subdued and the key policy rate has been
left unchanged at 2.0 per cent since June 2003. Bank of Japan has indicated
that it would be continuing with the current policy of quantitative easing till
such time as the consumer price deflation ends on a sustainable basis. In fact,
central banks in some countries such as Argentina, Brazil, South Africa and
Sweden have reduced their policy rates during 2004. Overall, therefore, while
the central banks displayed mixed reactions in terms of preferences for soft,
neutral and hardening biases, the choice of a specific stance by a country/region
seems to have been preponderantly guided by its own domestic economic considerations.
30. Notwithstanding the strengthening
of growth momentum, global demand for oil and higher oil prices have outpaced
expectations. In international oil markets, crude prices have risen to record
nominal highs and the uptrend continues with increased volatility. In addition,
tight inventory position and greater geopolitical uncertainties have encouraged
speculative activities in the futures markets. If this scenario continues, it
will significantly undermine the global growth prospects, with a disproportionately
larger burden on oil importing emerging markets like India. Admittedly, the
current oil shock is not as intense as the previous major oil shocks consequent
on a reduction in the oil intensity of global output. For example, in the earlier
oil price shocks, nominal crude oil prices had increased by 252 per cent during
1973-74, 179 per cent during 1978-80, 58 per cent during 1989-90 and 57 per
cent during 1999-2000. Nevertheless, oil prices continue to be a key determinant
of global economic prospects. International crude prices have already risen
over 60 per cent since January 2004. As developing countries have not reduced
their dependence on oil as much as developed countries, they remain particularly
vulnerable. The International Energy Agency (IEA) has warned that a US $ 10
price increase per barrel of oil sustained over one year could trim about 0.8
per cent of Asia's overall economic growth. The IMF has estimated that US $
5 per barrel increase in oil prices would reduce global growth by about 0.3
percentage point after one year.
31. Another major downside risk
facing the global economy continues to emanate from global imbalances and the
associated possibility of disruptive currency adjustments and persistent structural
problems in the euro area and Japan. The US fiscal balance has deteriorated
rapidly from a surplus position in 2000 to a large deficit which has added to
the pressures for an expanding current account deficit. Further, the fiscal
correction in some euro area countries has been less than anticipated. Many
emerging markets are experiencing current account surpluses vis-á-vis
the US. The fiscal deficit in the US, which was earlier being financed by the
domestic private sector, is now being substantially financed by central banks
of Asia. The twin deficits in the US economy constitute a major challenge confronting
the international community.
32. The deflationary expectations
that prevailed over last two years have now given way to some inflation concerns
in most advanced economies, though the consumer price inflation as well as core
inflation still remains at relatively low levels. The concern over inflationary
impact of global oil prices, however, remains muted mainly because of three
factors: First, the productivity gains in many economies have helped build resilience
to shocks. Second, increasing trade liberalisation has given the opportunity
to source goods and services from least cost sources; resultant competition
in tradable goods has lowered consumer prices. Third, the oil intensity of global
output has reduced over time. However, if current hardening of global oil prices
persists, it could feed through input costs and transport costs that could also
impact landed prices of traded goods. If general prices or inflation expectations
are impacted, wage costs could rise, which in turn could lead to persistence
of price pressures. Conversely, there is a view that oil prices would moderate
with easing of demand pressures given the long positions in the futures market.
33. The impact of rising oil
prices depends on the structure of the economy and the stage of the business
cycles in which it is placed. For oil importing emerging markets like China
and India, the impact would be relatively more significant given the increasing
oil intensity and lower energy efficiency. Nevertheless, the global macroeconomic
environment, in spite of the increase in the oil prices and some hardening of
interest rates, remains supportive of international capital flows.
34. The broadening of global
recovery has had a positive impact on the health of financial intermediaries.
External financing conditions for emerging markets have also improved. New issuance
through bonds, equities and syndicated loans, by either sovereign borrowers
or corporate borrowers in emerging market countries so far this year, has been
higher than last year. Global financial markets today appear largely stable
with efforts being made to reduce bad loans in several countries, and equity
markets turning less volatile. Moreover, international financial markets have
remained calm despite some transition to higher interest rates. Interest rate
forward markets suggest that if rate hikes in future remain modest, markets
could adjust without much negative effect.
35. The Indian forex market
generally witnessed orderly conditions during the current financial year so
far (April-October 2004). The exchange rate of the rupee, which was Rs.43.39
per US dollar at end-March 2004, depreciated by 5.2 per cent to Rs.45.77 per
US dollar by October 21, 2004. It also depreciated by 7.9 per cent against Euro,
by 4.3 per cent against Pound sterling and by 1.9 per cent against Japanese
yen during the period. Foreign
exchange reserves increased by US $ 7.6 billion from US $ 113.0 billion at end-March
2004 to US $ 120.6 billion as on October 21, 2004.
36. In recent years, the annual
policy Statements as well as mid-term Reviews have attempted to bring into sharper
focus the main lessons emerging from our experience in managing the external
sector during periods of external and domestic uncertainties. As articulated
in the policy Statements in the recent years, the broad principles that have
guided exchange rate management are:
- Careful monitoring and management of exchange
rates without a fixed target or a pre-announced target or a band. Flexibility
in the exchange rate together with ability to intervene, if and when necessary.
- A policy to maintain a level of foreign exchange
reserves which takes into account not only anticipated current account deficits
but also ‘liquidity at risk’ arising from unanticipated capital movements.
- A judicious policy for management of the capital
account.
37. As pointed out in all
the recent policy Statements, the overall approach to the management of India’s
foreign exchange reserves in recent years has reflected the changing composition
of the balance of payments (BoP), and has endeavoured to reflect the ‘liquidity
risks’ associated with different types of flows and other requirements. The
policy for reserve management is thus judiciously built upon a host of identifiable
factors and other contingencies. Taking these factors into account, India’s
foreign exchange reserves are at present comfortable and consistent with the
rate of growth, the share of the external sector in the economy and the size
of risk-adjusted capital flows.
38. It is necessary to take
a medium-term view of the macroeconomic outlook, in particular the external
sector, in arriving at the desirable level of reserves. In this regard, the
potential for different magnitudes of current account deficit, as the GDP
growth accelerates, should be recognised. In view of the level of comfort
provided by the international financial architecture, apart from considering
reserves as an insurance against volatility in capital flows, there is need
to provide cushions against shocks. These could arise from uncertain monsoon
conditions in the real sector, variations in global oil prices in the external
sector and high levels of public debt in the fiscal arena. There is considerable
merit in taking a national balance sheet approach to the external sector and
to provide cushions through official reserves in response to increasing external
liabilities on account of the private sector. Further, it is useful to recognise
the comfort and the confidence provided to the investors by the level of reserves
in the context of volatility in capital flows.
39. Managing capital flows
is an issue closely related to the level of reserves. The annual policy Statement
had listed the important policy responses that could be used to manage large
capital inflows. A critical issue in this regard is a view on whether the
capital flows are temporary or permanent in nature. The recent episode of
large capital flows prompted a debate in the media on the need for exchange
rate adjustment. In a scenario of uncertainty facing the authorities in determining
temporary or permanent nature of inflows, it is prudent to presume that such
flows are temporary till such time that they are firmly established to be
of a permanent nature.
40. India’s exports during
April-September 2004 increased by 24.4 per cent in US dollar terms as compared
with 8.1 per cent in the corresponding period of the previous year. India’s
merchandise export growth surpassed that of most Asian countries during this
period. Imports rose faster by 34.3 per cent as against an increase of 21.0
per cent in the corresponding period of last year. Oil imports increased by
57.8 per cent as compared with 6.4 per cent. Non-oil imports increased by
25.8 per cent as against 27.4 per cent. The overall trade deficit widened
to US $ 12.7 billion from US $ 7.4 billion in the corresponding period of
the previous year. The higher trade deficit this year, in substantial part,
reflects the high oil imports bill in the wake of the hardening of international
prices and also the growth in import demand emanating from a pick-up in economic
activity as reflected in higher capital goods imports.
41. Destination-wise, India’s
exports to almost all the major regions/country groups recorded sharp improvement
during April-June 2004. Exports to developing countries in Asia increased
by about 40 per cent. Among the major partner countries, significant increases
in exports were recorded in respect of Belgium, France, the UK, the US, the
UAE, China, Hong Kong SAR, South Korea and Singapore.
42. The current account of
the BoP had remained in surplus consecutively over the past three years. The
first quarter of 2004-05 also posted a current account surplus of US $ 1.9
billion. The trade deficit (on payments basis) of US $ 6.3 billion was more
than offset by invisibles, including private transfers, of US $ 8.2 billion.
In addition, there was a significant increase of US $ 5.6 billion in net capital
inflows comprising mainly foreign direct investment (US $ 1.2 billion), commercial
borrowings (US $ 1.2 billion) and short-term credit (US $ 1.6 billion). As
a result, the net accretion to foreign exchange reserves, excluding valuation
effects, amounted to US $ 7.5 billion during April-June 2004.
43. During the second quarter
of 2004-05, however, there are indications that the continuing uptrend in
imports may result in the current account being only marginally in surplus
assuming continued robust growth of merchandise exports and invisible earnings.
Net capital inflows have moderated from the level recorded in the first quarter.
While it is difficult to anticipate the behaviour of capital flows in the
wake of the global geopolitical uncertainties, the positive sentiment on India
should augur well for continued buoyancy, but some moderation should not be
ruled out in view of turning of the global interest rate cycle.
44. The distinguishing features
of the external sector during 2004-05 could be summed up as follows: First,
import growth, both on oil and non-oil accounts, has been higher. While the
former is reflective of higher international oil prices, the latter reflects
the revival of investment demand as capital goods imports are strong. Second,
exports have increased at a stronger pace and could maintain the momentum,
given the positive outlook on global trade. Third, the trade deficit, however,
may widen essentially on account of higher oil prices. Fourth, invisibles,
particularly personal remittances, are expected to maintain the tempo on account
of rebound in global growth and expanding activity in oil exporting Middle
East countries. Fifth, the current account balance, which has remained in
surplus over the last three years, may still show a marginal surplus. Sixth,
capital inflows are expected to remain buoyant, albeit with some moderation
relative to the previous year. Seventh, there could be a structural shift
in capital inflows with more of foreign direct investment and short-term trade
credit, the latter reflecting increasing openness and competitiveness of the
industrial sector. Eighth, accretion to NRI deposits may slow down responding
to alignment of interest rates with international rates. Finally, it is reasonable
to expect that accretion to reserves will continue, albeit not at the
same pace as last year. Thus, management of liquidity arising out of external
flows will continue to be challenging.
45. The annual policy Statements
and mid-term Reviews have been continuously expressing concern over the unhedged
foreign currency exposures of corporates in view of its implications for financial
stability in the event of unforeseen adverse conditions. In the mid-term Review
of November 2003, banks were advised to adopt a policy, which explicitly recognises
and takes into account risks arising out of foreign currency exposures of
their clients. Accordingly, it was advised that all foreign currency loans
above US $ 10 million or such lower limits as may be deemed appropriate vis-à-vis
the banks’ portfolios of such exposures could be extended by banks on the
basis of a well laid out policy of their Boards except in cases of export
finance and loans for meeting forex expenditure. A recent study of select
banks on the implementation of such prudential norms revealed that though
most banks have adopted policies mandated by their Boards, banks often rely
on ‘natural hedge’ available with their customers. Further, information on
the total exposure of the corporate clients was also not readily available
with banks. In view of the systemic risk, banks are encouraged to obtain information
from their large borrowers on their unhedged forex exposures, so that the
banks, in turn, can assess the risk of their own exposure to such corporates
on an on-going basis.
Overall Assessment
46. In sum, from an overall
policy perspective and in qualitative terms, some of the areas that need further
attention could be as follows:
(a) A striking development
during the year relates to growth of non-food credit in the first half, which
is traditionally a slack season for credit off-take: credit during the first
half typically accounts for 20-40 per cent of the total credit for the year
as a whole. A noticeable feature in the recent years was the subdued growth
in non-food credit, though the second half of 2003-04 witnessed some pick-up.
In addition to the liquidity conditions, the mid-term Review of November 2003
had addressed credit delivery as one of the central themes. While expressing
a sense of satisfaction with credit growth in the later part of 2003-04, the
annual policy Statement had anticipated credit pick-up to continue, and had
accordingly stressed continuation of efforts to stimulate credit growth. A
review of developments so far in the current year confirms that there has
been a revival of investment activity. There is some evidence of expansion
plans being brought forward and scaling up of production plans. To the extent
manufacturing industry is showing signs of robust growth, the credit needs
will witness higher growth than that in the past which was dominated by growth
in the services sector. As a result of the current policy thrust, credit to
agriculture is also picking up from its low base and could initiate greater
credit penetration by displacing non-institutional lenders. The fast growing
housing and consumer credit sectors also represent some degree of higher penetration,
but the quality of lending needs to be ensured. Overall, the pick-up in investment
activity and growth in non-food credit appear to be broad based and are not
temporary phenomena. These favourable outcomes point to the need for enabling
liquidity conditions and a continued thrust on credit delivery to the productive
sectors of the economy.
(b) Growth in GDP is likely
to be less than originally projected mainly due to deficient monsoon conditions
and partly due to high and volatile oil prices, despite a better than anticipated
outlook for manufacturing industry and export demand. The initiation of accelerated
growth in manufacturing industry amidst global competitive pressures is a
positive development and needs to be supported by policy to ensure its momentum.
It is worth noting that manufacturing provides a good base for tax revenues
in India. In view of the impressive business confidence, both domestically
and internationally, it would be prudent for the policy to be predicated on
an efficient and growing manufacturing sector, with resultant higher demands
for credit.
(c) In regard to prices, the
annual policy Statement had referred to the overhang of problems on account
of oil prices and large domestic liquidity. As it turned out, while overhang
of excess liquidity was being managed, a supply shock emanated out of global
developments, mainly on account of oil and a few other key commodities like
iron & steel. Some pressures were anticipated, but not the magnitude of
the supply shock and its persistence. Current indications are that the situation
of uncertainty, high and volatile oil prices may persist during the rest of
the year. Further, the full impact of oil price increases is yet to be absorbed
in domestic prices. The supply factors, therefore, will continue to dominate
the price situation, while demand management seems to invite closer attention
than before, particularly for stabilising inflationary expectations in a credible
manner. It is also necessary to recognise the risks of stronger adjustments
that may be needed if less than adequate adjustments are made at the appropriate
time, though the timing, the magnitudes as well as the instruments are based
as much on judgements as on facts and projections.
(d) The financial markets
have, by and large, exhibited stability. The equity markets, which exhibited
exceptional volatility in mid-May, have settled down to a normal state. The
money market and forex market continue to be stable. The government securities
market has tended to show some nervousness in recent months and was characterised
by an overall bearish sentiment. Several inter-related aspects might have
contributed to such a sentiment. First, the market was in need of correction
from excessive optimism; second, there was an unexpected surge in inflation;
third, the sharp increase in non-food credit has also put some pressure on
expectations; fourth, the global environment has tended towards some hardening
of interest rates in recent months. While these developments were not fully
unanticipated, and RBI had invited attention to them in the annual policy
Statement, some market participants appear to have been less than fully prepared
as the events unfolded. The Reserve Bank will continue to give some weight
to consideration of stability but the markets should be prepared for the uncertainties.
The extent of liquidity available as well as the strength of the external
sector provides cushions against any undue pressure on financial markets.
The market participants, in particular banks, have acquired some experience
and considerable expertise in facing the uncertainties inherent in a market
economy.
(e) Conduct of monetary policy,
in the best of times, is complex since it has to be forward looking and based
on current and sometimes outdated data relative to rapid changes. Additional
complexities arise in the case of an emerging market which is transiting from
a closed to a progressively open economy. The overhang of liquidity impacts
on the pace of change in the stance of monetary policy as also on the effectiveness
of some operating instruments. Currently, the combination of factors that
complicate monetary management includes: globally transmitted supply shock;
less than normal monsoon conditions; persistence of liquidity overhang; and
long-awaited pick-up in non-food credit. The policy has been responding to
the evolving circumstances based on analysis and some judgements. First, in
November 2003, there was a widespread expectation of further progress in soft
bias in interest rate regime. A view was taken that the interest rate cycle
had reached the bottom. Second, a judgement had to be made on capital flows
in the early part of the current calendar year as to what part of the capital
inflows should be treated as temporary. In this regard, the fact that international
financial markets react asymmetrically to the same magnitude of growth in
forex reserves (positively) and to the depletion in forex reserves (very negatively)
cannot be lost sight of. Third, empirical evidence indicates that the perceptions
of the financial markets in the context of changes in political executives
in the Government cannot be ignored while monitoring developments. Fourth,
when some central banks start moving from easy to more neutral policy and
hike policy interest rates, there is an inevitable impact on Indian financial
markets. In response to these developments, decisions have to be made on an
ongoing basis, about the weight to be given to stability in financial markets
relative to the possible costs of not altering the approaches. Fifth, when
faced with a severe oil-shock, the first of its kind in the liberalised market-oriented
environment in a semi-open economy, the governing thought in making judgements
is the harmonisation of the communications and policy responses of RBI along
with corresponding fiscal and corporate initiatives. Thus, the conduct of
policy in the first half of the year was characterised by responses to developments
on an ongoing and measured basis, giving appropriate weights, contextually,
to global and domestic factors, to growth and price stability, to efficiency
and financial stability and to over-riding concerns for the common person.
Operationally, it is expected that the challenge for the rest of the year
would broadly remain the same, viz., management of liquidity in tune with
the draining of the overhang, progress of borrowing programme of the Government,
the evolving domestic and global situation, especially oil prices and global
interest rate environment, but with equal weight to considerations of maintaining
growth momentum and stabilising inflationary expectations.
II. Stance of Monetary Policy
for the Second Half of 2004-05
47. The annual policy Statement
of May 2004 had indicated that, barring the emergence of any adverse and unexpected
developments in the various sectors of the economy and assuming that the underlying
inflationary situation does not turn adverse, the overall stance of monetary
policy for 2004-05 will be:
- Provision of adequate liquidity to meet credit
growth and support investment and export demand in the economy while keeping
a very close watch on the movements in the price level.
- Consistent with the above, while continuing
with the status quo, to pursue an interest rate environment that is
conducive to maintaining the momentum of growth and, macroeconomic and price
stability.
48. Monetary management in the first half of
2004-05 was conducted broadly in conformity with the monetary policy stance
announced in the annual policy Statement. However, monetary management faced
severe challenges on two counts. One, overhang of liquidity. Two, acceleration
in headline WPI inflation beyond the anticipated level with implications for
inflationary expectations. While capital inflows were not at the level of the
previous year, the carry forward of liquidity into the current fiscal was over
Rs.81,000 crore. The liquidity balance was complicated further by a sharp increase
in reserve money in the previous year emanating largely from build-up of excess
cash balances by commercial banks towards the close of the year, in fact in
the last week of March 2004.
49. The Reserve Bank sought to manage the liquidity
essentially through two instruments, viz., MSS and LAF. As the volumes under
MSS rose, the visible liquidity under LAF declined. The reduction of liquidity
under LAF helped in stabilising the yield curve at the shorter end. This was
evident from the CBLO rates, market repo rates and overnight call money rates
inching closer to the LAF repo rate. It was, however, noticed that there was
some bunching of liquidity due to the 7-day minimum tenor of LAF repo which
imparted volatility to short-term rates, particularly around the time of primary
auctions of government securities. Accordingly, overnight fixed rate repo under
LAF was introduced in August, in place of overnight variable rate repo discontinued
in April, to smoothen liquidity flow and contain volatility. While the excess
liquidity has come down with the combined effect of a slowdown in capital inflows
and better domestic absorption on account of higher credit demand, it still
remains substantial at around Rs.67,000 crore as reflected in the combined volume
of MSS and LAF.
50. There has been an understandable impact
of the inflation scenario during the current year on the government securities
market. As the headline WPI inflation accelerated, government debt market reacted
with considerable volatility and an overall downward movement in the gilt prices.
However, markets tended to stabilise as the causes of inflation and policy responses
became apparent. Consultations with banks and the prudential guidelines on classification
of investment portfolio of banks into held to maturity (HTM) category issued
in September also helped to reassure the markets.
51. The upward pressure on WPI inflation largely
emanated from trends in international commodity prices, particularly oil. As
the WPI commodity basket covers the tradable items, it rose faster than the
CPI. Unlike most countries, WPI continues to be the headline inflation rate
in India for various reasons. However, the increasing openness of the economy
has widened the wedge between WPI and CPI. Similar divergence between price
indices at the producers’ level and the consumers’ level has been noticed for
most countries except for countries in the euro area. As between the international
and domestic factors, the former continues to be dominant in explaining the
increase in WPI. The international factors relate primarily to prices of oil,
iron ore, coal mining and iron & steel but also, to some extent, financial
markets, including interest rates and exchange rates.
52. It may be necessary to capture some nuances
in outlook for and measurement of inflation and their relationship with policy
response in the current context of inflationary expectations. On the issue of
outlook, the rapid increases in productivity and trade liberalisation enabling
the globally least-cost producer to influence setting of prices, have tended
to impart a downward bias. On the issue of appropriate index of inflation, analysts
point out that WPI in India is similar to producers’ price index (PPI) in other
countries and that, in other countries, the headline inflation is usually the
CPI. More important, internationally, empirical evidence shows that WPI or PPI
tends to be more volatile than CPI.
53. In this context, a recount of the divergence
between WPI and CPI could be instructive. Over the last five years, average
WPI inflation was 4.6 per cent and CPI inflation was lower at 3.9 per cent.
In the recent years, the year-on-year WPI inflation rate was higher in the range
of 6.0-9.0 per cent during most parts of 2000-01. Again, inflation remained
high in the range of 6.0-7.0 per cent for sometime during 2003-04. As these
inflationary episodes were considered to be largely caused by supply side factors,
the inflation rate reversed itself quickly once the supply situation stabilised.
54. While the headline inflation responds to
both supply shocks and demand pressures, the nature of response could be quite
different. The response of inflation to supply shocks is quick but transient.
The response to demand shocks on the other hand, is more subtle but persistent.
As indicated in the annual monetary and credit policy Statement of April 2001,
a factor which complicates the conduct of monetary policy during certain periods
is the difficulty encountered in precisely assessing the potential inflationary
pressures based on the available data for the current period. While there are
uncertainties, it is perhaps useful to look at the recent inflation history
for an assessment of inflationary expectations.
55. In the context of current inflation scenario,
an issue of policy interest for financial management by banks and other market
participants is whether, after a sharp decline in the past four years, the interest
rate cycle has turned. As is well known, the outcome for interest rates depends
mainly on the outlook for inflation, growth prospects and investment demand
and it is not possible to predict short-run movements in interest rates, either
up or down, without taking cognizance of possible movements in all other macroeconomic
variables. These variables are also subject to unanticipated changes because
of unforeseen domestic or external developments. However, the system has to
recognise interest rate cycles and strengthen risk management processes to cope
with eventualities so that financial stability could be maintained and interest
rate movements could be passed in a non-disruptive manner.
56. As the overall assessment of the current
inflation scenario shows that it is largely supply induced, the monetary authorities
have to balance the pros and cons of using monetary policy instruments as a
means of stabilising inflationary expectations. At the present juncture, the
concern over inflation is a global phenomenon and different monetary authorities
have responded differently, essentially tailoring their policy response according
to their specific situations.
57. Given the large informal sector and the
fact that a vast majority of population is not hedged against inflation, determined
efforts are needed to contain inflationary expectations. In this context, careful
assessment of facts and reasons on an ongoing basis is important for appropriate
policy response: First, while the annual policy Statement had anticipated some
upswing in prices, the actual increase was higher than expected. Second, the
pick-up in inflation was predominantly a result of supply shock with global
factors playing a critical part, though domestic factors such as liquidity overhang
and monsoon conditions also played a role. Equally important, it is necessary
to communicate the assessments and policy responses from time to time in a credible
manner, both for financial markets and inflationary expectations.
58. Subsequent to the announcement of the annual
policy Statement, the following calibrated responses were taken: First, the
Reserve Bank communicated its assessment of the nature of inflation to the market
on several occasions. Second, given the supply induced nature of inflation,
the Government responded with fiscal measures, particularly relating to oil.
The fiscal actions and some responses from corporates on moderating the exercise
of their pricing power were part of the measured but harmonised responses along
with monetary policy actions in liquidity management. Third, in order to enable
the Reserve Bank to address the overhang of liquidity, the Government raised
the ceiling of MSS from Rs.60,000 crore to Rs.80,000 crore. Fourth, for a more
flexible management of liquidity, overnight fixed rate repo under LAF was introduced.
Fifth, CRR was raised by one-half of one percentage point to 5.0 per cent. This
measure reduced the liquidity in the banking system by about Rs.9,000 crore.
Further, the interest rate on eligible CRR balances was delinked from the Bank
Rate and was reduced to 3.5 per cent per annum. However, Reserve Bank will continue
to pursue its medium-term objective of reducing CRR to its statutory minimum
of 3.0 per cent. The Reserve Bank chose to increase the CRR, partly for absorbing
liquidity in the system, but more importantly for signalling the Bank’s concern
at the unacceptable levels of inflation so that inflationary expectations are
moderated while reiterating the importance of stability in financial market
conditions.
59. The Reserve Bank will continue to ensure
that appropriate liquidity is maintained in the system so that all legitimate
requirements of credit are met, consistent with the objective of price stability.
Towards this end, RBI will continue with its policy of active demand management
of liquidity through OMO including LAF, MSS and CRR, and using the policy instruments
at its disposal flexibly, as and when the situation warrants.
60. In the Part I of this Review, detailed discussions
have been presented on the likely levels of major macroeconomic and monetary
aggregates after assessing the relevant factors. In light of the discussion,
for the purpose of monetary management:
(i) GDP growth in 2004-05 is placed in the range
of 6.0 to 6.5 per cent as against 6.5-7.0 per cent envisaged earlier under certain
assumptions;
(ii) inflation, on a point-to-point basis, could
be around 6.5 per cent as against 5.0 per cent projected earlier;
(iii) expansion in M3 would be around
14.0 per cent as projected earlier;
(iv) growth in aggregate deposits would be Rs.2,18,000
crore as projected earlier; and
(v) non-food bank credit including investments
in bonds/debentures/shares of public sector undertakings and private corporate
sector, commercial paper (CP) etc., is expected to increase by around 19.0 per
cent, higher than 16.0-16.5 per cent projected earlier; the higher credit expansion
could be accommodated without putting undue pressure on money supply because
of lower borrowing of the Government from the banking sector; in the eventuality
of government borrowings being larger, unwinding of MSS would facilitate such
borrowings.
61. Since the announcement of the annual policy
Statement in May 2004, the world economic outlook has remained stable though
there are some positives and some concerns in the domestic economy: GDP growth
may turn out to be slightly lower; whereas WPI inflation has firmed up, CPI
inflation remains moderate; interest rates in the money and government securities
markets have increased; interest rates in the bank credit and deposit markets
have remained stable; the forex market also remained stable; expansion in money
supply is within the trajectory and excess liquidity has remained sterilised;
credit demand has been far more than anticipated; business outlook is turning
out to be increasingly positive; the current account may still show a marginal
surplus and capital inflows remain somewhat buoyant.
62. Looking forward, the overhang problems arising
out of high international oil prices and continued high domestic liquidity continue,
albeit with some moderation. There are considerable uncertainties regarding
the future course of oil prices and how the shock would turn out to be globally
and how it could be absorbed domestically. The increase in international oil
prices is yet be reflected fully in the domestic economy. The secondary effect
of oil price increase is not yet very apparent. The large first half increase
in domestic credit is likely to be sustained in the rest of the year.
63. In sum, consistent with the developments
during the first half of the year, barring the emergence of any adverse and
unexpected developments in the various sectors of the economy and keeping in
view the inflationary situation, the overall stance of monetary policy for the
second half of 2004-05 will be:
- Provision of appropriate liquidity to meet
credit growth and support investment and export demand in the economy while
placing equal emphasis on price stability.
- Consistent with the above, to pursue an interest
rate environment that is conducive to macroeconomic and price stability, and
maintaining the momentum of growth.
- To consider measures in a calibrated manner,
in response to evolving circumstances with a view to stabilising inflationary
expectations.
III. Financial Sector Reforms
and Monetary Policy Measures
64. The annual policy Statements
as well as mid-term Reviews of RBI have been focusing on the structural and
regulatory measures to strengthen the financial system. In the context of
opening up of the economy, as deregulation continues, the emphasis on regulatory
practices has shifted towards effective monitoring and assurance of implementation
of regulations. In this direction, the measures aim at increasing the operational
effectiveness of monetary policy, redefining the regulatory role of RBI, strengthening
the prudential and supervisory norms and developing the institutional infrastructure.
The management of financial sector over the years has been oriented towards
rebalancing between efficiency and stability and sound public policies for
successful economic integration. The Reserve Bank is continuously working
towards consolidating the gains of the financial sector reforms by further
broadening the consultative process. While the emphasis, at this stage, is
on reinforcing corporate governance within financial institutions, the focus
is also on enhancing the credit delivery mechanism and facilitating ease of
transactions by the common person. This Section reviews the progress of implementation
of the measures already taken and proposes some further measures to carry
forward the process of financial sector reforms.
Monetary Measures
(a) Bank Rate
65. In the annual policy Statement
of April 2003, the Bank Rate was reduced from 6.25 per cent to 6.0 per cent
with effect from the close of business on April 29, 2003. On a review of the
macroeconomic developments, it is considered desirable to leave the Bank Rate
stable (at 6.0 per cent) at present.
(b) Repo Rate
66. In view of the current
macroeconomic and overall monetary conditions, it has been decided:
- To increase the fixed repo rate by 25 basis
points under the liquidity adjustment facility (LAF) of the Reserve Bank
effective from October 27, 2004 to 4.75 per cent from 4.50 per cent.
67. The reverse repo rate will continue to
be linked to the repo rate, as at present. However, the spread between the
repo rate and the reverse repo rate is reduced by 25 basis points from 150
basis points to 125 basis points with effect from October 27, 2004. Accordingly,
the fixed reverse repo rate under LAF will continue to remain at 6.0 per cent.
68. As already announced, it is proposed to
switchover to the international usage of the terms ‘repo’ and ‘reverse repo’
effective October 29, 2004. With such a switchover, the fixed reverse repo
rate will be 4.75 per cent and the repo rate will be available with a spread
of 125 basis points at 6.0 per cent.
(c) Revised Liquidity Adjustment Facility
69. As indicated in the annual policy Statement,
a revised liquidity adjustment facility (LAF) scheme was operationalised effective
March 29, 2004 on the basis of recommendations of an Internal Group on LAF
after extensive discussions with market participants and experts. The Group
had observed that "it would be desirable to de-emphasise the passive
sterilisation attribute of the LAF repo facility so that it could emerge as
the exclusive policy signaling rate". The operationalisation of MSS to
absorb liquidity of more enduring nature has considerably reduced the burden
of sterilisation on the LAF window. Accordingly, the repo volumes tendered
under LAF declined markedly from an average of Rs.70,523 crore in April 2004
to Rs.4,010 crore as on October 21, 2004. With a view to enhancing further
the effectiveness of LAF and to facilitate liquidity management in a flexible
manner, it is proposed that:
- Liquidity adjustment facility (LAF) scheme
would be operated with overnight fixed rate repo and reverse repo with effect
from November 1, 2004. Accordingly, auctions of 7-day and 14-day repo (reverse
repo by international parlance) would stand discontinued from November 1,
2004.
70. The Reserve Bank will continue to have
the discretion to conduct overnight/longer term repo/reverse repo auctions
at fixed rate or at variable rates depending on market conditions and other
relevant factors. In addition, as already advised, LAF participants are required
to switchover to the international usage of the terms ‘repo’ and ‘reverse
repo’ effective October 29, 2004. Accordingly, absorption of liquidity by
the Reserve Bank in the LAF window will be termed as ‘reverse repo’ and injection
of liquidity as ‘repo’.
Interest Rate Policy
(a) Ceiling on Interest Rates on NRE
Deposits
71. With a view to aligning interest rates
on Non-Resident (External) Rupee (NRE) deposits with international interest
rates, ceiling on NRE deposit rates linked to the US dollar LIBOR/SWAP rates
of corresponding maturities was introduced effective July 17, 2003. The ceiling
interest rates on NRE deposits have since been revised from time to time.
On a review, it is proposed:
- To raise the ceiling on NRE interest rates
to LIBOR/SWAP rates of US dollar of corresponding maturities plus 50 basis
points from the existing level of US dollar LIBOR/SWAP rates.
(b) Fixation of Interest Rates on FCNR(B)
Deposits
72. At present, interest rates are fixed on weekly
basis for FCNR(B) deposits, while interest rates are fixed on monthly basis
in respect of NRE deposits. Based on the suggestions received from banks and
with a view to bringing in consistency in the procedure of fixing interest rates,
it is proposed that:
- Banks may fix the ceiling on interest rates
on FCNR(B) deposits on monthly basis for the following month based on rates
prevailing as on the last working day of the preceding month. The ceiling
interest rates on FCNR(B) deposits, however, would continue to be at LIBOR/SWAP
minus 25 basis points as hitherto.
(c) Reduction of Tenor of Domestic Term
Deposits
73. At present, while the minimum maturity
of wholesale domestic term deposits (Rs.15 lakh and above) is 7 days, it continues
to be 15 days for retail domestic term deposits (under Rs.15 lakh). In order
to provide uniformity in the tenor of term deposits, it is proposed that:
Banks, at their discretion,
can reduce the minimum tenor of retail domestic term deposits (under Rs.15
lakh) from 15 days to 7 days.
74. Banks, however, would
continue to have the freedom to offer differential rates of interest on wholesale
domestic term deposits of Rs.15 lakh and above as at present.
Credit Delivery Mechanism
75. In continuation of several
measures taken to create a conducive environment for banks to provide adequate
and timely finance at reasonable rates to different sectors of the economy,
and keeping in view the imperative need for removal of bottlenecks in credit
delivery mechanism, the following measures/initiatives are proposed:
a. Service Area Approach: Removal
of Restrictive Provisions
76. As recommended by the
Vyas Committee, with a view to facilitating banks to improve their
credit delivery mechanism, it is proposed:
To dispense with the restrictive provisions of
service area approach except for government sponsored programmes.
77. Modalities and operational
guidelines will be issued in consultation with the Government and NABARD.
b. Priority Sector Lending
(i) Enhanced Lending to Agriculture
and Distribution of Inputs
78. As recommended by the
Vyas Committee, with a view to further improving credit delivery to the agriculture
sector, it is proposed:
To increase the limit on advances under priority
sector for dealers in agricultural machinery from Rs. 20 lakh to Rs.30 lakh
and for distribution of inputs for allied activities from Rs.25 lakh to Rs.40
lakh.
(ii) Enhanced Lending to Small and Marginal Farmers
79. As recommended by the
Vyas Committee, in order to improve flow of credit to small and marginal farmers,
it is proposed that:
Banks should make efforts to increase their disbursements
to small and marginal farmers to 40 per cent of their direct advances under
special agricultural credit plans (SACP) by March 2007.
(iii) Special Agricultural Credit Plans
80. With a view to achieving
the priority sector lending target for agriculture, public sector banks are
required to formulate SACP. In order to enhance flow of credit to agriculture,
it is proposed to extend the SACP mechanism to private sector banks. Accordingly:
- All private sector banks are urged to formulate
special agricultural credit plans from the year 2005-06, targeting an annual
growth rate of at least 20-25 per cent of credit disbursements to agriculture.
(iv) Enhancement of Composite Loan Limit
to SSI Units . 81. At
present, banks extend composite loans to SSIs through a ‘single window’ system
for fixed assets and working capital requirements up to a limit of Rs.50 lakh.
In order to facilitate smooth flow of credit to SSIs, it is proposed:
To enhance the composite loan limit for SSI entrepreneurs
from Rs.50 lakh to Rs.1 crore.
(v) Investment by Banks in Securitised Assets Pertaining to SSI Sector
82. In order to encourage
securitisation of loans to SSI sector, it is proposed that:
- Investments made by banks in securitised
assets representing direct lending to the SSI sector would be treated as
their direct lending to SSI sector under priority sector, provided the pooled
assets represent loans to SSI sector which are reckoned under priority sector
and the securitised loans are originated by banks/financial institutions.
. (vi) Housing Loan: Enhancement of Ceiling
.
83. At present, banks’ direct finance for
housing up to Rs.10 lakh in rural and semi-urban areas is treated as priority
sector lending. In order to further improve flow of credit to the housing
sector, it is proposed that:
Banks, with the approval of
their Boards, may extend direct finance to housing sector up to Rs.15 lakh,
irrespective of location, as part of their priority sector lending.
(c) Financing of Distressed
Urban Poor
84. With a view to bringing
in urban poor into formal financial system, it is proposed that:
Banks may advance loans to distressed
urban poor to prepay their debt to non-institutional lenders, against appropriate
collateral or group security.
(d) Micro-finance
85. The Reserve Bank has taken
a number of initiatives, over the years, for mainstreaming micro-credit and
enhancing the outreach of micro-credit providers. As on end-March 2004, about
1.1 million self help groups (SHGs) were linked to banks covering 16 million
poor families. Total flow of credit was Rs.3,900 crore with an average loan
of Rs.36,000 per SHG and Rs.2,400 per family. Banks are encouraged to further
strengthen this process.
86. As per announcement in
the Union Budget for 2004-05, credit linking of 5.85 lakh SHGs needs to be
completed by March 2007. Specific steps are being taken to identify district
level bottlenecks in regions where linkage has been relatively low.
(e) Kisan Credit Card Scheme:
Follow-up of Survey
87. Over the years, the kisan
credit cards (KCC) scheme has been modified to include term loans for agriculture
and allied activities besides a reasonable amount of credit to meet the consumption
needs. Public sector banks have issued 14.42 million KCCs up to end-July 2004.
88. As indicated in the annual
policy Statement, the National Council of Applied Economic Research (NCAER),
conducted a national impact assessment survey of KCC scheme. The survey identified
areas where further fine-tuning is needed, viz., restrictions imposed on the
issuance of KCCs by security conscious banks; restrictions on the use of KCCs
only at card issuing branches; non-availability of incentives/rewards to borrowers
for timely repayments; low credit limits to meet the farmers’ requirements
and low awareness level regarding the provision of the personal accident insurance
scheme. With a view to further improving the flow of credit to agricultural
sector under the scheme, IBA has been advised to look into these suggestions
and take remedial action.
(f) Rural Infrastructure Development
Fund: Status
89. The rural infrastructure
development fund (RIDF) was established in NABARD to extend credit to state
governments for developing rural infrastructure. The total allocation under
RIDF (I to X) since its inception was Rs.42,000 crore with total disbursement
of Rs.21,742 crore. As announced in the Union Budget for 2004-05, RIDF X has
been established with a corpus of Rs.8,000 crore.
(g) Debt Restructuring Mechanism for Medium
Enterprises
90. As indicated in the annual
policy Statement, a Special Group was constituted (Chairman: Shri G. Srinivasan)
to formulate a mechanism for restructuring the debt of medium sector enterprises
on the lines of the corporate debt restructuring (CDR), with members from
SIDBI and commercial banks. The Group is expected to submit its Report soon
which will be placed in the public domain.
(h) Regional Rural Banks
91. Regional rural banks (RRBs)
are an important instrument for purveying rural credit. In order to strengthen
RRBs: weak RRBs were recapitalised, lending to non-target group was relaxed,
deposit and lending rates were deregulated. The Reserve Bank has constituted
Empowered Committees in its Regional Offices with members drawn from NABARD,
sponsor banks, conveners of SLBCs and state governments to ensure that the
RRBs adhere to good governance and comply with prudential regulations. The
Committees would also focus on operational issues and provide clarifications
on regulatory issues. State governments are being requested to remove discrimination
between RRBs and co-operative banks in matters of stamp duty, mortgage fee
etc. State governments are also being requested to accord approval of merger
of RRBs within the state, sponsored by the same bank, as and when approached
with such proposals. Sponsor banks are advised to provide support to their
RRBs in matters relating to efficient management, training of staff, computerisation
and networking of their activities.
(i) Revival of Rural Co-operative
Banks: Status
92. The Government has appointed
a Task Force (Chairman: Prof. A. Vaidyanathan) to propose an action plan for
reviving the rural co-operative banking institutions and suggest an appropriate
regulatory framework for these institutions. The Task Force is expected to
submit its Report shortly.
(j) Lending to Agriculture:
Review of Progress
93. The Government announced
a package of measures on June 18, 2004 aimed at doubling the agricultural
credit in three years with a credit growth of 30 per cent for 2004-05. Pursuant
to the announcement, RBI and IBA issued guidelines to commercial banks, while
NABARD issued similar guidelines to co-operative banks and RRBs. These guidelines
include: (i) debt restructuring and provision of fresh loans to farmers affected
by natural calamities; (ii) one time settlement for small and marginal farmers;
(iii) fresh finance for farmers whose earlier debts have been settled through
compromise or write-off; and (iv) relief measures for farmers indebted to
non-institutional lenders. While the progress is encouraging, banks are urged
to keep up the momentum.
(k) Liberalisation of Bank Finance
to NBFCs
94. In view of the expertise
gained by NBFCs in financing second hand assets and to encourage credit dispensation,
it is proposed that:
- Banks may, henceforth, extend finance to
NBFCs against second hand assets financed by them, provided suitable loan
policies duly approved by the banks’ Boards are put in place.
(l) Gold Card Scheme for Exporters: Status
95. As indicated in the annual policy Statement,
guidelines on gold card scheme for creditworthy exporters with good track
record, for easy availability of export credit, were issued to banks. Most
of the public sector banks and many private sector and foreign banks have
since announced such schemes, offering better terms of credit and rates to
the gold card holders.
(m) Report of Working Group on Credit
Enhancement by State Governments
96. As indicated in the annual policy Statement,
the Working Group on Credit Enhancement by State Governments, is examining
the instruments of credit enhancement which the state governments could offer
to improve the rating/borrower capability of state PSUs/SPVs in order to attract
institutional financing for infrastructure projects. The Group is expected
to submit its Report shortly.
Money Market
97. With a view to preserving the integrity
of money market and making it more efficient, a number of measures were undertaken
in recent years. Further measures in this direction are as under:
(a) Moving towards Pure Inter-bank Call/Notice
Money Market .
98. At present, non-bank entities could lend,
on average in a reporting fortnight, up to 45 per cent of their average daily
lending in call/notice money market during 2000-01. In view of further market
developments as also to move towards a pure inter-bank call/notice money market,
it is proposed that:
- With effect from the fortnight beginning
January 8, 2005, non-bank participants would be allowed to lend, on average
in a reporting fortnight, up to 30 per cent of their average daily lending
in call/notice money market during 2000-01.
99. However, as indicated in the earlier policy
Statements, in case a particular non-bank institution has genuine difficulty
in developing proper alternative avenues for investment of excess liquidity
because of its size, RBI may consider providing temporary permission to lend
a higher amount in call/notice money market for a specific period on a case
by case basis.
(b) Commercial Paper .
100. With a view to developing the commercial
paper (CP) market further, a status paper was placed on RBI website which
was discussed with market participants as well as in the Technical Advisory
Committee on money, foreign exchange and government securities markets (TAC).
Taking into account the suggestions and market response, the following measures
are proposed:
- In order to provide an option to issuers
to raise short-term resources through CP as also an avenue to investors
to invest in quality short-term papers, the minimum maturity period of CP
is reduced from 15 days to 7 days with immediate effect.
- In order to provide transparency and also
facilitate benchmarking of CP issues, issuing and paying agents (IPAs) would
report issuance of CP on the negotiated dealing system (NDS) platform by
the end of the day. The date of commencement of reporting would be finalised
in consultation with market participants.
- With a view to moving towards settlement
on T+1 basis, a Group comprising market participants would be constituted
to suggest rationalisation and standardisation in respect of processing,
settlement and documentation of CP issuance.
(c) Collateralised Borrowing
and Lending Obligation
101. As proposed in the annual
policy Statement, automated value-free transfer of securities between market
participants and the CCIL was facilitated to further develop the collateralised
borrowing and lending obligation (CBLO) segment.
Government Securities Market
102. The Reserve Bank has
taken several structural and developmental measures for deepening and widening
the government securities market. In this direction, some of the recent initiatives
are highlighted below:
(a) Negotiated Dealing System: Next Step
103. As indicated in the annual
policy Statement, a Working Group (Chairman: Dr.R.H. Patil) reviewed the performance
of NDS in the context of its operational efficiency and recommended an anonymous
electronic screen based order matching trading system on the NDS. The Report
of the Group is being placed in the public domain for wider dissemination.
(b) Introduction of Capital
Indexed Bonds
104. As indicated in the annual
policy Statement, a discussion paper on the capital indexed bonds (CIBs) was
put on the websites of RBI and the Government for comments. In this regard,
market conventions for secondary market trading and settlement of the bonds
are being finalised in consultation with Fixed Income Money Market and Derivatives
Association of India (FIMMDA) and Primary Dealers Association of India
(PDAI). Suitable modifications in the PDO-NDS trading, clearing and settlement
system are being undertaken. It is expected that CIBs could be introduced
during the year 2005-06 in consultation with the Government.
(c) Working Group on Primary
Dealers
105. In order to evaluate
the role of Primary Dealers (PDs) in the government securities market with
particular emphasis on their obligation and ability to cope with emerging
risk and possible diversification of their balance sheets, a sub-group (Chairman:
Dr.R.H. Patil) of the TAC was constituted. The Report of the sub-group is
being placed before the TAC for advice to enable further action.
(d) Settlement of OTC Derivatives
through CCIL: Status
106. As indicated in the annual
policy Statement, ‘in principle’ approval was accorded to CCIL for implementation
of a clearing arrangement for OTC derivatives. CCIL has since developed the
pricing and risk models for this process, which are being fine-tuned on the
basis of market feedback. The clearing arrangement is expected to be operationalised
by March 2005.
(e) Group on Corporate Debt:
Status
107. With a view to further
developing the corporate debt market, a Group was constituted with members
from RBI, SEBI and other market participants. The Group, inter alia,
would examine the issues relating to primary issuances as well as growth of
secondary market; regulatory aspects for the development of Asset Backed Securities
(ABS) and Mortgage Backed Securities (MBS); and trading, settlement and accounting
of corporate debt securities. The Group is expected to submit its Report in
January 2005.
(f) Market Stabilisation Scheme:
Review
108. As indicated in the annual
policy Statement, in order to facilitate sterilisation of excess liquidity
in a transparent manner, market stabilisation scheme (MSS) was introduced
in March 2004. The ceiling on the outstanding obligation of the Government
under the scheme has been raised from Rs.60,000 to Rs.80,000 crore. The threshold
level of the ceiling for further review is placed at Rs.70,000 crore. Treasury
Bills and dated securities with a face value of Rs.54,146 crore were issued
under the MSS up to October 21, 2004, out of which dated securities amounted
to Rs.25,000 crore.
(g) Strengthening OMO Framework
109. The Fiscal Responsibility
and Budget Management Act stipulates that, with effect from April 1, 2006,
RBI’s participation in primary issues of government securities will stand
withdrawn. Consequently, open market operations (OMO) will become a more active
instrument, warranting a review of processes and technological infrastructure
consistent with market advancements. The Reserve Bank’s intervention directly
in the market or through PDs on a real time basis may become necessary. A
Study Group will be constituted for strengthening OMO framework to address
these emerging needs and equip RBI as well as the market participants appropriately.
Foreign Exchange Market
110. In order to further simplify
the systems and procedures to offer better customer service as also to continue
with the liberalisation process, the following measures are proposed:
(a) Issue of Guarantee for Trade
Credits: Liberalisation
111. At present, authorised
dealers (ADs) are required to obtain RBI approval for issue of guarantees,
letters of undertaking or letters of comfort in favour of overseas suppliers
or banks for their importer clients. In order to promote investment activity
and to further liberalise the procedures relating to trade credits on imports,
it is proposed:
- To accord general permission to ADs to issue
guarantees/letters of comfort and letters of undertaking up to US $ 20 million
per transaction for a period up to one year for import of all non-capital
goods permissible under Foreign Trade Policy (except gold) and up to three
years for import of capital goods, subject to prudential guidelines.
(b) Export Oriented Units: Relaxation of
Time Limit for Export Realisation
112. At present, all status holder exporters
are permitted a time period of twelve months for realisation and repatriation
of export proceeds. In line with the announcement made in Government’s Foreign
Trade Policy in September 2004, it is proposed that:
- 100 per cent EOUs and units set up under
EHTPs, STPs and BTPs schemes would be permitted to repatriate the full value
of export proceeds within a period of twelve months.
(c) Booking of Forward Contracts: Relaxation
113. At present, importers/exporters are permitted
to book forward contracts on the basis of past performance (without production
of the underlying documents) up to the average of their past three years’
or the previous year’s turnover, whichever is higher. While outstanding contracts
under the facility at any point of time should not exceed 50 per cent of the
eligible limit, contracts booked in excess of 25 per cent of the eligible
limit are not allowed to be cancelled. Further, importers/exporters are required
to approach RBI for approval of higher limits. In order to further liberalise
the process, it is proposed:
- To increase the limit for outstanding forward
contracts booked by importers/exporters, based on their past performance,
from 50 per cent to 100 per cent of their eligible limit. However, the contracts
booked in excess of 25 per cent of the eligible limits would be on deliverable
basis.
(d) Forex Market Group .
114. In order to review comprehensively the
initiatives taken by RBI so far in the foreign exchange market and identify
areas for further improvements, it is proposed to constitute an internal Group.
The Group would look into the market developments and liberalisation process
in terms of products/participants and their impact, regulatory regime in the
current and evolving circumstances, international experience relating to markets
and suggest appropriate approaches for further liberalisation. The Group would
consult with market participants and the TAC and submit its Report within
three months.
(e) Survey on Impact of Trade Related Measures
.
115. Over the years, RBI has taken a number
of measures to reduce the cost of trade related transactions to exporters.
A survey on transaction cost for exporters undertaken by EXIM Bank, in select
ten sectors, revealed that transaction cost had decreased to 1-10 per cent
of the export revenue from the earlier range of 10-15 per cent. In view of
the substantial relaxation and simplification of procedures in the recent
period, it is proposed to undertake a fresh survey for evaluation of the impact
of these measures on the transaction cost for exports.
Prudential Measures
116. Since announcement of the annual policy
Statement, several steps have been taken for further deregulation while ensuring
best prudential risk management practices. Guidelines for issue of long-term
bonds by banks, introduction of graded higher provisioning according to the
age of NPAs, increased risk weight for exposure to PFIs, enhanced coverage
of country risk management guidelines, implementation of KYC norms to combat
money laundering and financing of terrorism are steps to foster better risk
management practices in banks. Further, enhancement of single and group borrowers
exposure norms and relaxation on unsecured exposure limits have provided increased
operational flexibility to banks to improve credit delivery. The Standing
Technical Advisory Committee on Financial Regulation and the institution of
a mechanism for inter-regulatory exchange of information would further enhance
the transparency and consultative process. Further measures proposed in this
area are as under:
(a) Migration to Basel II Norms: Next
Steps
117. As indicated in the annual policy Statement,
Basel Committee on Banking Supervision (BCBS) issued the New Capital Accord
(Basel II) in June 2004. A seminar for the chief executives of select banks
was conducted in July 2004 to sensitise banks on the framework, opportunities
and challenges emerging out of Basel II norms. Banks were also advised to
undertake a self assessment of their existing risk management systems taking
into account the three major risks covered under Basel II and to concurrently
initiate appropriate measures to upgrade them to match up to the minimum standards
prescribed under Basel II. Further, in view of the complexities involved in
migrating to Basel II, a Steering Committee comprising members from banks,
IBA and RBI has been constituted. The Steering Committee would form sub-groups
for purposes of assisting it on various matters. On the basis of the inputs
received from the Steering Committee, RBI would prepare draft guidelines for
implementation of Basel II norms and place them in the public domain.
(b) Draft Guidelines on Ownership and Governance
118. With a view to reducing concentration
of shareholding and control in banks and ensuring corporate governance, a
comprehensive policy framework for ownership and governance in private sector
banks was issued and placed in public domain for wider discussion. Based on
the responses received and dialogues with various stakeholders, a second draft
on the policy framework has been finalised and will be put in public domain
soon.
(c) Fit and Proper Criteria for Directors
of Banks: Status .
119. As indicated in the mid-term Review of
October 2001, the Consultative Group of Directors of Banks and FIs (Chairman:
Dr. A.S. Ganguly) had made a number of suggestions to strengthen the supervisory
role of Boards of banks and FIs. Accordingly, banks were advised to place
the Report before their Boards and implement the recommendations, which were
within the regulatory ambit of RBI. Further, on the basis of the recommendations
of the Group, private sector banks were advised:
(i) to undertake a process of due diligence
to determine the suitability of the person for appointment/continuing to hold
appointment as a director on the Board, based upon qualification, expertise,
track record, integrity and other ‘fit and proper’ criteria;
(ii) to obtain necessary declaration and undertaking
from the proposed/existing directors in a prescribed format; and
(iii) to constitute Nomination Committees by
their Boards to scrutinise such declarations. Necessary instructions have
already been issued to the private sector banks in this regard.
(d) Transparency: Public Disclosure of
Penalties/Directions
120. In view of the added emphasis on the
role of market discipline under Basel II and with a view to enhancing further
transparency, banks were advised on October 19, 2004 that all cases of penalty
imposed by RBI as also strictures/directions on specific matters including
those arising out of inspection will be placed in the public domain.
(e) Warehouse Receipts and Commodity Futures:
Role of Banks
121. Farmers are vulnerable to price risk
and the emerging commodity futures exchanges in the country are expected to
help minimise such risk. With a view to examining the role of banks in providing
loans against warehouse receipts and evolving a framework for participation
of banks in commodity futures markets, it is proposed:
To set up a Working Group with
members from RBI, IBA, Forward Markets Commission (FMC) and banks.
(f) Review of Corporate
Debt Restructuring Mechanism
122. As indicated in the annual
policy Statement of April 2003, the corporate debt restructuring (CDR) mechanism
operationalised in March 2002 was last reviewed by a High Level Group (Chairman:
Shri Vepa Kamesam). A recent review of the operation of the scheme revealed
that nearly one-third of the units assisted under the scheme has improved
their financial position. However, from the systemic point of view, issues
relating to proper identification and successful implementation of packages
along with other operational aspects need to be addressed. Accordingly, a
Special Group was constituted to review the performance of the CDR mechanism
and suggest further measures to make it more effective. The Group is expected
to submit its Report by December 2004.
(g) Housing Loans and Consumer Credit: Temporary
Risk Containment
123. It is observed in the
recent past that the growth of housing and consumer credit has been very strong.
As a temporary counter cyclical measure, it is proposed:
- To put in place, risk containment measures
and increase the risk weight from 50 per cent to 75 per cent in the case
of housing loans and from 100 per cent to 125 per cent in the case of consumer
credit including personal loans and credit cards.
(h) Banks’ Investment in Non-SLR Securities:
Status
124. As indicated in the annual policy Statement,
prudential guidelines on non-SLR investments were issued to banks giving a
transition period up to end-December 2004 for compliance. However, a study
of select banks revealed that banks continue to have significant share of
unlisted and unrated investments in their non-SLR portfolio. Accordingly,
banks are urged to prepare themselves to comply with the prudential requirements
within the prescribed timeframe.
(i) Prudential Norms for Classification
of Doubtful Assets for FIs .
125. With a view to moving closer to international
best practices and ensuring convergence of the norms applicable to the FIs
with those of the banks, it is proposed that:
- With effect from March 31, 2005, in respect
of FIs, an asset would be classified as doubtful, if it remained in the
sub-standard category for 12 months. FIs are permitted to phase out the
consequent additional provisioning over a four-year period.
(j) Approach for Supervision of Financial
Institutions
126. As indicated in the mid-term Review of
November 2003, the Report of the Working Group on Development Finance Institutions
(Chairman: Shri N. Sadasivan) was placed in the public domain for wider dissemination.
On the basis of the recommendations of the Working Group and the feedback
received thereon, the following approaches for supervision of the DFIs and
large NBFCs are proposed:
The Reserve Bank would continue
to supervise NABARD, SIDBI, NHB and EXIM Bank as hitherto.
The Reserve Bank would supervise
DFIs which accept public deposits.
DFIs and large NBFCs not accepting
public deposits but having asset size of Rs.500 crore and above would be subject
to limited off-site supervision by RBI.
(k) Dissemination of Credit Information by CIBIL
127. As indicated in the annual
policy Statement, banks/FIs were advised to obtain the consent of all their
borrowers for dissemination of credit information to enable Credit Information
Bureau of India Ltd. (CIBIL) to compile and disseminate credit information.
It was reported by a major nationalised bank that they have submitted credit
information relating to 80 per cent of their eligible borrowers after obtaining
necessary consents. Banks are urged to make persistent efforts in obtaining
consent from all their borrowers, in order to establish an efficient credit
information system, which would help in enhancing the quality of credit decisions
and improving the asset quality of banks, apart from facilitating faster credit
delivery.
(l) Working Group on Conflicts of Interest
in the Indian Financial Services Sector
128. There is increasing concern
internationally about the impact of the conflicts of interest in the financial
sector. Legislative and regulatory measures have been adopted by different
countries to ensure that conflicts of interest are not allowed to compromise
the interest of stakeholders and public at large. These measures are intended
to have positive impact on investor confidence, efficacy of the regulatory
framework and, above all, the credibility of those associated with the financial
services. Accordingly, in consultation with Chairman, SEBI and Chairman, IRDA,
it is proposed:
- To constitute a Working Group on avoidance
of conflicts of interest. The Working Group will identify the sources and
nature of potential conflicts of interest, the international practices to
mitigate this problem, the existing mechanisms in India in this regard and
make recommendations for avoidance of such conflicts of interest. The Group
would submit a Report in four months.
Urban Co-operative Banks
(a) Vision Document .
129. The urban co-operative banks (UCBs) are
playing a crucial role in the Indian financial system in channelising funds
and bridging the financing gaps in respect of small and medium borrowers.
As at end-March 2004, there were 1,926 UCBs with over 8,000 branches, with
deposits accounting for 7.5 per cent of deposits of the banking system. Nearly
45 per cent of the UCBs accounting for 55 per cent of the deposit base of
the sector are considered financially sound. In the context of the current
economic scenario and problems faced by the co-operative banking sector, several
initiatives were taken in consultation with the federations and associations
of co-operative banks. These include: deferring the application of 90 day
NPA norm for small loans and gold loans up to Rs.1 lakh by two years, giving
additional time for meeting the prescribed provisioning requirements for assets
classified in doubtful category, permission to transfer government and other
approved securities up to 25 per cent to HTM category.
130. A vision document for the future role
of UCBs is being evolved to ensure depositors’ interests and avoid contagion
while providing useful service to local communities. In regard to structural
issues, RBI would be encouraging growth of strong and viable entities within
the sector through consolidation. Further, RBI would continue to pursue with
the state and Central governments regarding the issues that arise in their
jurisdiction.
(b) Standing Advisory Committee on Urban
Co-operative Banks
131. The Standing Advisory Committee on UCBs,
a high powered body chaired by Deputy Governor, RBI, comprising members from
the Government, select state governments, IBA, DICGC, NABARD and federations
of UCBs advises RBI on matters relating to the UCB sector. With a view to
reinforcing the consultative process in a more constructive manner, to address
the structural/regulatory and supervisory issues relating to UCBs and facilitating
the process of formulating future approaches for this sector, the Committee
would meet on a quarterly basis in future.
Non-banking Finance Companies (a)
Road Map for Residuary Non-banking Companies
132. Residuary non-banking companies
(RNBCs) are a class of NBFCs which accept public deposits from public and
are required to invest 80 per cent of their deposits in the prescribed categories
stipulated by RBI from time to time and the remaining 20 per cent at their
discretion. Over a period, their deposits have grown substantially, with just
two companies accounting for more than 80 per cent of total public deposits
held by all NBFCs. In order to rationalise the pattern of the directed investments
and address the systemic risk, and with a view to protecting depositors’ interest,
the level of investments in government securities was increased, and rating
and listing requirements in respect of other approved investments were introduced
in June 2004. RNBCs were advised to reduce their discretionary investment
to 10 per cent of their deposits by April 2005 and completely dispense with
it from April 2006. RNBCs represented that the restriction on discretionary
investments would affect their viability and also requested for some modifications
in other prudential stipulations.
133. With a view to smoothening the process
of transition of RNBCs to compliance with RBI’s directions, the following
approach is proposed:
- Investments of RNBCs in certificates of deposit
of financial institutions which have a minimum rating of AA+ at the time
of investment will be reckoned as eligible securities as long as they have
minimum investment grade rating.
- Current account balances of RNBCs with commercial
banks would be considered as eligible investments.
- The investments of RNBCs in bonds and debentures
of companies which meet stipulated listing and rating requirements at the
time of investment will be considered as ineligible investments if they
migrate to below the investment grade rating.
134. In order to ensure that the depositors are
served appropriately and systemic risks are avoided, RBI intends to focus on
improvements in the functioning of RNBCs. These include:
(i) transparency of operations, especially in the
connected lending relationships;
(ii) corporate governance standards including professionalisation
of the Boards and ensuring ‘fit and proper’ criteria in consonance with the
standards in banks;
(iii) avoiding untenable rates of commission
to agents;
(iv) adherence to ‘know your customer’
rules through systems consistent with their business but subject to regulator’s
close oversight; and
(v) customer service in terms of clear indication
of the identifiable contact with the field agents so that matters such as unclaimed
deposits are appropriately addressed. Detailed guidelines in regard to action
to be taken by RNBCs on the above would be issued separately.
(b) Non-banking Financial Companies: Phasing out of Public Deposits
135. At present, NBFCs accepting
public deposits are regulated and supervised by RBI. Over a period, the dependence
of the NBFCs (other than RNBCs) on public deposits as part of their overall
resources has declined. The deposits of NBFCs declined from Rs.6,500 crore
in 2000-01 (17.2 per cent of their total liabilities) to Rs.3,400 crore in
2003-04 (12.7 per cent of the total liabilities). The number of deposit taking
NBFCs has also reduced from 996 in 1997 to 577 by September 2004. Internationally,
acceptance of public deposits is restricted to banks, and non-banks including
NBFCs raise resources from institutional sources or by accessing capital market.
NBFCs are encouraged to move in this direction in line with international
practices. The Reserve Bank will be holding discussions with NBFCs in regard
to their plan of action for voluntarily phasing out of their acceptance of
public deposits and regulations on banks’ lending to NBFCs will be reviewed
by RBI as appropriate.
(c) Asset Reconstruction Companies:
Enhancement of Capital Base
136. The Reserve Bank has
granted certificate of registration (CoR) to one more asset reconstruction
company (ARC), ASREC (India) Limited. With this, RBI has so far granted CoR
to three ARCs. In order that ARCs have a sound capital base and a stake in
the management of the NPAs acquired, the requirement of owned funds for commencement
of business has been stipulated as not less than 15 per cent of the assets
acquired or Rs.100 crore, whichever is less.
Technical Group on Refinancing
Institutions: Status
137. Following the announcement
in the annual policy Statement, a Technical Group on Refinancing Institutions
(Chairman: Shri G.P. Muniappan) was constituted with representatives of RBI,
apex refinancing institutions and external experts. The Group would study
the current regulatory framework and supervisory mechanism for financial entities
regulated/supervised and refinanced by NABARD, NHB and SIDBI vis-à-vis
those applicable to RBI regulated entities and make recommendations for bringing
about appropriate convergence/harmonisation. The Report is expected to be
submitted by December 2004.
Expert Group on Central Database
Management System: Status
138. As indicated in the mid-term
Review of November 2003, an Expert Group on Central Database Management System
(CDBMS) (Chairman: Prof.A. Vaidyanathan) was constituted by RBI to guide the
process of placing the publishable part of the CDBMS in the public domain
for the convenience of researchers, analysts and other users. The Group has
since submitted its Report and their recommendations are being put in the
public domain. The Group also examined the process of release of data from
the CDBMS to the public through a link (Database on Indian Economy) on RBI’s
website and, accordingly, it is proposed to release the first lot of the data
series covering key macroeconomic aggregates effective November 1, 2004.
Payment and Settlement Systems:
Status
139. The Reserve Bank has
taken a number of initiatives in order to put in place a safe, secure, efficient
and integrated real time payment and settlement system. The latest service
offer from RBI, the real time gross settlement (RTGS) system, provides for
an electronic based settlement of inter-bank and customer based transactions,
with intra-day collateralised liquidity support from RBI to the participants
of the system. The RTGS system has also been enabled for straight through
processing (STP) of customer transactions without manual intervention. Currently,
there are 92 member banks participating in RTGS transactions with average
daily turnover of about Rs.24,000 crore. As of now, banks offer RTGS payment
services through 1,095 branches located in 141 cities and towns. This coverage
is expected to increase to 3,000 branches in 275 centres by the year end.
The coverage will be extended to about 500 centres comprising commercially
important centres, capital market intensive centres and e-commerce centres.
140. The progress made in
specific areas and further initiatives in this regard are detailed below:
(a) Vision Document for Payment
and Settlement Systems
141. In view of the substantial
progress made in the payment and settlement system as envisioned in the ‘Payment
System Vision Document 2001-04’, RBI has taken steps to draft a document on
‘Payment and Settlement Systems Vision for 2005-08’ under the guidance of
the National Payment Council. The draft document will be placed in the public
domain for feedback and discussions. It is envisaged that the document will
be implemented from April 2005.
(b) Board for Payment and Settlement
Systems
142. It was indicated in the
annual policy Statement that RBI would set up a Board for Payment and Settlement
Systems (BPSS) that would lay down the policies for the regulation and supervision
of the payment and settlement systems encompassing the domestic and cross-border
systems. The constitution of the Board will ensure more effective regulation
and supervision of the various payment and settlement systems in the country.
The draft regulation to set up the BPSS has been submitted to the Government
for notification in the Gazette.
(c) National Settlement System
143. As indicated in the annual
policy Statement of April 2003, RBI proposes to introduce the national settlement
system (NSS) in a phased manner, by linking up different clearing houses managed
by RBI and other banks for centralised settlement at one place, with a view
to helping the banks to efficiently manage their funds and to eliminate avoidable
movement of funds around various centres for settlement purposes. It will
also help RBI to closely monitor the liquidity position of the banks. In the
first phase, the settlement for various clearings in the four metro cities
would be accounted for under the NSS. The NSS is expected to be operationalised
in early 2005.
(d) Working Group on Risk Mitigation
for Indian Retail Payment System
144. At present, all retail
payment systems, both paper-based and electronic-based, are settled on a deferred
net settlement basis. Such settlement has credit, liquidity and operational
risks that could lead to settlement failures. In order to put in place an
appropriate risk mitigation mechanism for the retail payment systems as also
to examine the operational implications of such a mechanism, a Working Group
with representatives from RBI, IBA and banks has been constituted by RBI.
The Group is expected to submit its Report by November 2004.
(e) ECS/EFT Transactions: Removal
of Ceiling
145. In order to facilitate
large scale usage of the electronic clearing system (ECS) and electronic funds
transfer (EFT) schemes for large value money transfers and to meet the requirements
of various segments of the financial sector including the securities markets,
the existing per transaction limits for ECS and EFT are being dispensed with
effective November 1, 2004.
(f) Working Group for Regulatory
Mechanism for Cards
146. In recent years, plastic
cards (credit, debit and smart cards) have gained greater acceptance and momentum
as a medium of financial transactions. Banks are issuing either their own
cards or cards under affiliation with international card issuing institutions.
The volume and value of transactions undertaken using these cards have increased
significantly. While recognising the popularity of cards, regulatory and customer
protection measures assume importance. Accordingly, it is proposed:
- To constitute a Working Group to look into
the regulatory and customer protection aspects and suggest measures for
card usage in a safe, secure and customer friendly manner.
Conduct of Government Business
(a) On-line Tax Accounting System: Status
.
147. As indicated in the annual policy Statement,
On-line Tax Accounting System (OLTAS) was operationalised in June 2004. Under
the OLTAS, 15 offices of RBI, and 11,699 authorised branches of 31 agency
banks transmit daily data on income/corporate tax collected by them to the
tax information network (TIN) hosted by National Securities Depository Ltd.
(NSDL). The income tax challan form has also been simplified and made into
a single copy challan.
148. In order to simplify the refund procedures
and ensure better customer service, RBI has suggested to Central Board of
Direct Taxes (CBDT) to do away with advice based refunds. CBDT has accepted
RBI’s suggestion for grant of refunds up to Rs.25,000 through Electronic Clearing
System (ECS) facility at select centres in respect of individual tax payers.
(b) On-line Indirect Tax Accounting System:
Status
149. At the request of the Central Board
of Excise and Customs (CBEC), a system similar to OLTAS has been envisaged
for streamlining the present systems and procedures in regard to transmission
of data pertaining to excise duty and service tax. The Reserve Bank has constituted
a High Powered Committee (Chairman: Shri J.N. Nigam) with members drawn from
the Government, IBA, State Bank of India, reputed information technology companies,
NSDL and RBI for this purpose.
International Financial Standards and Codes
150. As indicated in the annual policy Statement,
a review of the progress made on the implementation of the recommendations
of the Reports of the 11 Advisory/Technical Groups constituted by the Standing
Committee on International Financial Standards and Codes was considered by
a panel of advisers. Taking into account the suggestions of the panel, a revised
draft report is being placed in the public domain.
Annex
151. The details of the progress made in
implementation of recommendations of major Committees/Working Groups are given
in the Annex.
Mumbai
October 26, 2004
Annex. Working Groups: Progress
Report
Advisory Committee on Flow of Credit to
Agriculture and Related Activities from the Banking System (Chairman: Prof.V.S.
Vyas)
As indicated in the mid-term Review of November
2003, an Advisory Committee on Flow of Credit to Agriculture and Related Activities
from the Banking System (Chairman: Prof.V.S. Vyas) was constituted by RBI.
The Report of the Committee was placed on the RBI website. Several recommendations
of the Committee including those relating to the target for direct and indirect
lending for agriculture under priority sector lending, negotiable warehousing
receipt system, setting up of rural development and self-employment institutes,
agri-risk fund and micro-finance cells, computerisation of land records, permitting
access to ECB and granting autonomy to NABARD are being examined by Government
of India and NABARD. Other recommendations of the Committee which have been
accepted and implemented by RBI are detailed below:
- Measures announced in the annual policy Statement
for the year 2004-05 on (i) loan for storage facilities, (ii) investment
by banks in securitised assets, (iii) waiver of margin/security requirements
on agricultural loans up to Rs.50,000 and (iv) NPA norms for agricultural
finance.
- Banks were advised to initiate action in
regard to:
(i) entering into tie-ups with major tractor and farm machinery manufacturers
for financing the agriculturists in a cost-effective manner;
(ii) compliance with RBI’s directives on simplification of procedures, forms
for applications, rationalisation of internal returns, delegation of powers,
introduction of new loan products and margin money;
(iii) systems and procedures to make lending cost-effective as well as saving
avoidable expenses for borrowers;
(iv) evolving suitable credit products/packages for small borrowers;
(v) reducing information gaps by providing checklist of documents required
for loans;
(vi) exploring the financing models for oral lessees such as self help groups
(SHG) and joint liability groups (JLG);
(vii) complaints regarding delays/refusal to open savings bank accounts
of SHGs, inadequate/delayed credit support, and impounding of SHG savings
as collateral for loans;
(viii) preparing long-term plans in consultation with state governments
for wasteland/watershed development and providing resource support;
(ix) posting technical staff at head/controlling offices and changing the
mindset of bankers with regard to agricultural lending;
(x) appointment of direct selling agents subject to guidelines to be approved
by their Boards;
(xi) financing good working primary agricultural credit societies (PACS);
(xii) formulating time-bound programme for using IT in general branches;
(xiii) designing an appropriate incentive structure for prompt repayment;
(xiv) associating with contract farming subject to availability of proper
legal and regulatory framework in different states.
Working Group on Flow of Credit
to SSI Sector
(Chairman: Dr. A.S. Ganguly)
As indicated in the mid-term
Review of November 2003, a Working Group on Flow of Credit to SSI Sector (Chairman:
Dr. A.S. Ganguly) was constituted by RBI. The Report of the Working Group
was placed on the RBI website. Recommendations of the Group on definition
of SME sector, role of CGTSI, repealing of SFC Act and privatisation of SFCs,
rating mechanism for industrial clusters, conversion of Technology Bureau
of Small Enterprises into an independent Technology Bank are under consideration
of the Government of India, SIDBI, CGTSI and IBA. Recommendations on venture
capital financing, exploring ways for credit flow to SME sectors through special
purpose vehicles (SPVs), extending financial assistance to NGOs and MFIs and
working out innovative models for securitisation of the MFI receivable portfolio,
and credit rating and risk assessment of SMEs accredited to them by micro-credit
intermediaries in the form of NBFCs are under examination of RBI. Other recommendations
of the Working Group which were implemented by RBI are detailed below:
- Banks to identify new clusters and adopt
cluster-based approach for financing SME sector.
- Lead Banks to consider sponsoring specific
projects as well as widely publicise the successful working models of NGOs.
- Banks operating in the North East Region
encouraged to consider sanctioning higher working capital limits to SSIs
for maintaining higher level of inventory.
- Banks to explore new instruments for promoting
rural industry and to improve the flow of credit to rural artisans, industries
and rural entrepreneurs.
Working Group on Financial Conglomerates
As indicated in the mid-term
Review of November 2003, an inter-agency Working Group on Financial Conglomerates
was constituted by RBI with a member each from RBI, SEBI and IRDA. The report
of the Group was placed on the RBI website. The action initiated in
this regard is as under:
- Twenty four conglomerates have been identified
for the purpose and the first report based on the format recommended by
the Group is under compilation.
- A nodal cell has been established at RBI
for smooth implementation of the framework. Technical Committee with representatives
from all three regulators has been interacting and addressing issues arising
out of the reporting requirements.
Standing Committee on Procedures and Performance
Audit on Public Services (Chairman: Shri S.S. Tarapore)
As indicated in the mid-term
Review of November 2003, a Standing Committee on Procedures and Performance
Audit on Public Services (Chairman: Shri S.S. Tarapore) was constituted by
RBI. The four Reports of the Committee, viz., Reports on Foreign Exchange
Transactions, Government Transactions Relating to Individuals, Banking Operations
and Currency Management along with action taken reports of RBI were placed
on the RBI website. The recommendations of the Committee which have already
been implemented by RBI are detailed below:
Report on Exchange Control Relating to Individuals
- The name of Exchange Control Department changed
to Foreign Exchange Department effective January 31, 2004.
- Simplified application cum declaration form
introduced for drawal of foreign exchange.
- FAQs and printed pamphlets on important facilities
issued.
Report on Government Transactions Relating
to Individuals
- Citizens’ charter revamped and displayed
in RBI’s public departments with brochures, available with all offices.
- Applications standardised for savings bonds
containing features and subscribers’ rights with regard to services thereunder
introduced in all offices/agencies.
- Regional Offices to organise customer meets
and customer service orientation training for staff and conduct on the spot
verification of arrangements provided by agency banks.
- New Delhi and Chennai offices to implement,
on pilot basis, issue of post-dated interest warrants in the case of senior
citizens.
Report on Banking Operations
- Ad hoc Committees/CEOs of banks advised to
take necessary action for adoption of IBA’s model deposit policy by all
banks.
- Banks to constitute a Customer Service Committee
of the Board/at the Apex level, to address issues such as formulation of
deposit policy for the bank, establishment of product approval process,
operation of deceased depositor's accounts, survey of depositor satisfaction
and the triennial audit of customer services.
- Banks advised to include in their deposit
policy that changes in any instruction on the operation of the senior citizens'
deposit accounts should be confirmed to the depositor within a month.
- Banks to remove unfair practices in respect
of despatch of cheque books through courier, to avoid inscrutable entries
in pass books/statement of accounts, not to include in the account opening
form information collected for purposes other than KYC.
- Ad hoc committees to examine the working
of enquiry counters in the banks.
- Banks to examine the recommendation for appointment
of Quality Assurance Officers in their banks. Ad hoc Committees of banks
are to take necessary action in this regard.
- Regional offices to constitute a Group on
Customer Service for ongoing monitoring of the quality of the customer service
provided by the banks in their region.
- Incognito visits by RBI officers to bank
branches to assess the level of customer services. RBI to consider giving
weightage to depositors' complaints while evaluating a bank's performance.
- Banks to develop a comprehensive and transparent
policy on collection of cheques and interest compensation for delayed collection
in line with the instructions issued by RBI from time to time. Changes,
if any, in the policy to be intimated to the customers promptly.
Report on Currency Management
- Banks and Regional Offices to ensure compliance
regarding recommendations of the Report on services to common persons.
- Revised draft citizen’s charter put on the
RBI website and circulated among RBI offices/banks.
- Note refund rules with simplified explanations
put on the RBI website.
- Currency chest agreement is being revised.
- The bank branches maintaining small coin
depot advised to freely accept uncurrent coins.
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