The Hindu Business Line : An aggressive stance

THE RBI's latest review of the Monetary Policy is characterised by a greater degree of "aggression" towards the resolution of specific issues than its more benign previous editions.

While the widely-anticipated hike the reverse repo rate (and the repo rate, now delinked from the Bank Rate and acting as its proxy) by 25bps will cushion short-term volatility (of all markets — money, foreign exchange, and equity), the Bank Rate itself has been maintained at its existing level in order not to slow the pace of GDP growth.

Also, the RBI's undertone has shifted from benign to sharp in its statements that it may be difficult to contain inflation in the 5.0-5.5 per cent p.a. range projected earlier, and that only a part of the higher international crude oil price is currently reflected in domestic oil prices. The RBI's hard-nosed prescription to banks for Small and Medium Enterprises finance recognises the increasing stress faced by the SME sector because of rapid globalisation.

Similarly, there is emphasis on agricultural lending, partially through restructuring Regional Rural Banks (RRBs), which have been recognised as an important vehicle for banking in the rural and semi-urban areas.

For capital market exposure, too, the RBI has mooted the more aggressive linking of such exposure to the lending bank's net worth, rather than to their level of advances as of the previous year-end.

This change not only ties in capital market exposure to a more suitable parameter, but also overcomes the tendency of many banks to inflate their March 31 advances level. While the impact of this change will be known only after detailed guidelines are issued, it is unlikely at this juncture to result in a very large overall reduction in the absolute amount of capital market exposure for the banking sector from the current level.

Even while referring to the rationalisation of financing NBFCs as a conduit for providing bank finance to the SMEs, the transport sector, and the like, the RBI has promised to initiate a supervisory review process with banks that have significant exposure to certain "sensitive sectors" — real estate, highly-leveraged NBFCs, venture capital funds, and the capital markets — thus ensuring some deceleration in the flow of credit to these sectors.

Finally, by making it mandatory for banks to introduce basic "no frills" accounts with zero minimum balances and low services charges, the RBI has sought to put in place a mechanism to reduce cash transactions in the economy, to restrict many banks' growing tendency to cater only to the higher strata of society, and in general to address legitimate concerns in respect of greater "financial inclusion".

This, in fact, highlights the stark contrast between two service sectors — the banking sector and the airlines industry. While the traditional "luxury segment" airlines industry has been moving on its own towards catering to lower-income groups through "no frills" services, the banking sector (meant to span the economy across all segments) appears to need regulatory intervention to ensure that lower-income sections are not excluded from its benefits!

(The author is Managing Director, IndusInd Bank Ltd.)

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