Financial Daily from THE HINDU group of publications
Tuesday, Nov 04, 2003

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Opinion - Credit Policy
Money & Banking - Credit Policy

Delineating four distinct strands

N. Nagarajan

INSTEAD of examining individual measures in detail, which would amount to missing the woods for trees, let us concentrate on the basic macro aspects of the policy. There are four distinct strands in the policy announced today. First and foremost is the optimism. The expected rate of growth in GDP has been revised upwards from 6.0 per cent to 6.5-7 per cent. According to Dr Ashok Lahiri, Chief Economic Advisor, Finance Ministry, this is "conservative" implying that the actual growth rate could still be higher. Another indicator of optimism is the satisfaction on the external front. Exchange reserves are continuously scaling new highs, which was unheard of till recently. Finally, the inflationary outlook is benign. On a point-to-point basis, the annual rate of inflation for 2003-04 is being revised downwards to 4-4.5 per cent.

The second important feature is the shift towards qualitative aspects of the Monetary and Credit Policy. Instead of tampering with the numbers, such as change in bank rate, cash reserve ratio, repo rate and so on, the emphasis is on ensuring that the benefits of lower lending rates percolates across the board to all segments of the economy with due consideration for sector-specific leads and lags.

Some examples in this respect are: Measures to improve credit delivery to agriculture and small-scale industry, simplification of procedures and complete flexibility in the micro-finance structure, road map for financial institutions to adopt the 90-day norm for recognition of loan impairment, and advice to the banks to set up ad hoc committees to improve customer service, including the review of RBI regulations impinging on customer services.

The third aspect is the emphasis on appropriate institution building to improve the financial system. In pursuance of this, the policy has proposed the setting up of committees/working groups to make a comprehensive review and suggest ways to improve credit flow.

The fourth feature is the indirect message issued to the banking system. They are required to improve their customer services, enhance efficiency by lowering transaction costs, learn to operate with reduced margins, ensure that the benefit of the reduction in the lending rates percolates to all sectors of the borrowers, and, above all, be more transparent. The RBI's insistence on benchmark PLR, and the requirement of IBA to advise banks in this regard are indicative of the last-mentioned aspect.

An important indicator of the policy response is the movement of the market. In this respect, Dr Y.V. Reddy's maiden policy announcement had the market in a tizzy. The turn over at the gilt market was substantial, and pertinently, the yields remained fairly steady, which is indicative of market strength. These reflect the success of Dr Reddy's promise to continue with change.

(The author is Chief Economic Advisor, Indian Banks' Association.)

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Stories in this Section
Not a rainmaker

Marked by concerns of over-heating
Explaining the status quo
Will keep market cool
Qualitative measures
Delineating four distinct strands
Mid-Term Review of Monetary and Credit Policy — Has not rocked the boat
Silence louder than clang of instruments
When the going is good, why tinker?
Bank profitability will not be hurt
Making a cautious debut
Cheaper capital still elusive
Trouble-free Review
FDI investment

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