The Hindu Business Line : Credit Policy — RBI prefers to wait and watch

THE latest Credit Policy should rank as the best possible in the current context. Like a seasoned batsman who has a relaxed stance but refuses to pre-decide what stroke to play, the Reserve Bank of India seems to prefer a `wait and warn' approach and act only when required. With inflation, interest rates, credit off-take and crude oil prices at uncomfortable, but not threatening, levels, one feels that the central bank thinks it fit to respond based on how these variables respond.

For export-oriented units (EOUs), the process credit period extension has been made easier; this is in line with overseas market norms. Thus far, multinationals have been comfortably outbidding these units on credit terms. Exporters, therefore, should be a happier lot.

While the freedom to book forward contracts for 100 per cent of receivables on estimated basis is all right, there is the risk of making serious miscalculations; the last two quarter results of some heavyweight software firms bear this out.

Prudent risk management would suggest a lower than 100 per cent hedge ratio, especially in a stable market such as India. Even a freedom of 50 per cent seems adequate, especially when imports, loans and other payables could be kept open to offset the remaining exposure and, thus, achieve a higher effective hedge.

The easing of buyers credit procedure for imports is also welcome. Given Libor + 50 bps (the RBI's cap) and cash credit rates of 10-12 per cent for a working capital cycle of six months, there would be an over 3 per cent cost advantage on sales for imports vis-à-vis local purchase.

With the RBI procedure now getting out of the way, this situation would continue; at times, the procedures themselves, though regressive, acted as an effective credit control measure.

The hike in risk weightage for housing and consumer loans seemed necessary, but not for credit cards. Credit card advances are largely returns (to the banks) driven. Most credit card users are unaware of the actual interest rates they are subject to and the issuers, in any case, specialise in coining newer charges to squeeze their customers dry. Recently, the chief of one of the largest credit cards issuers in the UK declared that he was loath to using credit cards for fear of excessive net effective interest rates.

Forcing credit card issuers to be more transparent, by pre-disclosing the `net effective interest rates' and charges, would prompt customers to weigh other loan options. This would have been better than the 25 per cent increase in risk weight.

Despite the suspense and intense expectations, the RBI's Credit Policy has hardly invited adverse comments. This should be seen as market approval for the regulator's measures.

Both liquidity (after the recent CRR impounding) and interest rates have been delicately balanced. But industry is slowly exhausting capacities built up in the mid-1990s, and opportunities to optimise capital further are not endless. Fresh capacities are vital for continued growth in industry.

Any interest rate hike at this stage could have played spoilsport. With the Government completing only 29 per cent of its net borrowings, there will be pressure on liquidity soon and interest rates could start climbing. Even as the RBI has done well by not tinkering with interest rates, one wonders whether the 0.25 per cent hike in repo rate was necessary.

As regards inflation, how much if it is because of `too much money chasing too few goods' and how much as a result of cost factors is to be seen.

High crude oil prices, absorption of the 17 per cent hike in coal prices a few days before the Budget and the significant strengthening of the dollar in recent months — all cost-push factors — have had a significant impact on inflation.

If liquidity were the cause, the impact would have been felt earlier, and not just in the past 2-3 months.

The RBI has revised its estimates of both inflation (1.5 per cent upwards) and growth (0.5 per cent downwards). Given the steep growth last year and the poor monsoon this year, agriculture may not achieve the projected 3 per cent growth. If this happens, overall growth rates could fall to as low as 5-5.5 per cent. But building such numbers into the Policy would have irked a government which is seen as pro-agriculture.

Coming to exchange rates, the dollar has depreciated against other major currencies. If one goes mainly by fundamentals, the dollar can suffer further erosion in value — against the rupee as well — in the short-term.

A few statements from the RBI would have been helpful to dollar earners. Unless, of course, one views the revising of the limits that can be booked forward as the RBI signalling to the dollar earners to book 100 per cent of expected receivables now, else, regret.

In sum, to be effective, the Credit Policy would require some amount of tinkering.

(The author works with a large chemical manufacturer exporter. The views are personal.)

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