The Hindu Business Line : RBI to consider controls on working capital credit by banks

Bangalore, April 24 In a bid to tame mounting inflationary pressures, the Reserve Bank of India is likely to revisit selective credit controls to supplement monetary measures already in place, say banking sources familiar with the development.

Some discussions on the measures have already been conducted, the sources said. Bankers expect the measures to be introduced in the lean season Credit Policy to be announced next week.

This is largely in view of the speed at which inflation has shot past the 7 per cent mark on a year- on-year basis, well above the RBI’s target of 5 per cent.

‘Very strong measures’

Selective credit controls mechanisms were used during the 1980s and imply choking of credit availability to certain sectors sensitive to inflation.

The RBI then had laid down inventory norms for a whole range of commodities, netting out supplier credits against inventories the percentage of bank credit etc. for estimating the quantum of credit that a business was entitled to avail itself from the banking industry.

Incidentally, even the Federal Reserve Board of the US has kept the credit control options open for containing inflation, though seldom used in the recent past.

But the Chairman and Managing Director of the public sector Vijaya Bank, Mr Prakash P. Mallya, said, “Credit controls are very strong measures that generate results. But other options are also available.”

That the RBI was not averse to using harsh measures to battle inflation was amply demonstrated in last weekend’s 50 basis points hike in the cash reserve ratio.

May target foodgrains

HDFC Bank’s Chief Economist, Dr Abheek Barua, said, “Credit controls on agricultural commodities will have a quick impact on the inflation numbers.” Accordingly, bankers said, controls were expected to target agricultural commodities. The WPI on primary products has jumped to 236 points or about 13 per cent over the corresponding period of the last year. Similarly in the case of the food products, the WPI has jumped by about 13 per cent.

Raising risk weightage

However, bankers said, raising the risk weightages on the credit extended to a sector is a new option.

In fact, in 2006, risk weightage on realty sector was hiked to 150 per cent.

Such credit controls measures, bankers said, immediately impact the cost of the carry to traders in food grains and edible oils, items that have seen large price increases during the last few months.

Increases in the carry costs would result in release of inventories and bring down prices.

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