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Dharmalingam Venugopal

THE Mid-term Monetary and Credit Policy for the year 2003-04 shows that the RBI Governor, Mr Y. V. Reddy, is not for rhetoric; nor for needless tinkering. Instead, the message is clear that the Governor is for action and implementation.

As the Governor explained, the essence of this policy is to create the ground for the second generation of financial reforms through continuous interaction with the banks. The banks will have a busy time with the governor in the coming years.

Economic fundamentals have rarely been so favourable in recent memory to script a Credit Policy. GDP forecast for 2003-04 has been upgraded by 0.5 to 1 per cent even as inflation projection is being revised down by 1 per cent. Money Supply (M3) growth and reserve money growth are within control. Foreign exchange situation is comfortable and stable. Exports are beginning to look up. Against this background, the growth of bank credit, or rather the lack of it, appears indeed incongruous. How did this happen? The Governor has preferred not to venture into any explanation. Instead, he has exhorted the banks and other financial intermediaries to do some serious introspection to find out for themselves why the demand for credit has been tapering off; why lending rates cannot be sufficiently lowered to match credit demand; why the quality of service to certain sections of the borrowers are so deficient; and finally, must the banks squeeze the depositors so much to protect their spreads.

This places enormous responsibility on the banks, which have to devise their own ways to improve credit off take depending on their respective strengths and weaknesses. The Governor has listed four broad areas where the credit flow deserves immediate attention, namely, small and medium enterprises (SMEs), infrastructure, agriculture and micro financing. It is also proposed to utilise expeditiously the deposits of Foreign Banks lying with Small Industries Development Bank of India (SIDBI) towards their priority sector shortfall and pass on the benefits of reductions in interest rates to the borrowers. The Indian Banks Association has announced that a sub-committee is working on the modalities of formulating various benchmark PLRs for different types of credit. The net effect of this when adopted by individual banks would be to enable them to bring down the interest rates over a wider range of borrowings than at present.

(The author is an economist with Indian Overseas Bank)

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