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Wednesday, Oct 30, 2002

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Columns - On Mint Street

Will the banks listen to RBI?

P. Devarajan

WILL banks cut PLRs this week and by how much?

At the press conference, the RBI Governor, Dr Bimal Jalan, made it clear RBI has not issued any orders. Only a request has been put to review the interest rate structure, Dr Jalan said. In the last credit policy, the RBI did make a promise to get banks to make public, spreads on each loan product. Today the credit policy admits, "a few banks have reduced marginally their maximum spreads." The RBI has found spreads varying widely across banks and bank groups.

The RBI statement adds: "According to available information, there has been some reduction in the maximum and minimum interest rates charged by banks. The information would be put on the RBI Web site, as soon as the data system gets stabilised." Can one say the banks have hijacked the spread agenda?

At long last, the RBI has come down on the discretionary habit of co-operative banks, regional rural banks (RRBs) and local area banks (LABs) to offer interest incentives to depositors. RRBs and LABs could pay an incentive of 0.50 per cent per annum over that prescribed by commercial banks. Similarly, urban co-op. banks were allowed to pay extra interest not exceeding one per cent on savings deposits.

It pushed up costs and RBI has now told RRBs and LABs to get off the practice. Co-operative banks have been told not to pay interest on current accounts and that applies to sponsor banks of RRBs. But the RBI is still unsatisfied over the idea of an apex supervisory body for the urban cooperative banks.

In April 2001, the central bank proposed the idea of a body to take over the entire inspection/supervisory functions relating to scheduled and non-scheduled UCBs. In April 2002, the RBI revolted against the dual regime for this sector. Today, the RBI admits, "In view of the local interest involved, it is also clear that there is no consensus at present in favour of removing supervisory and regulatory responsibilities at Central/State Government levels, and for entrusting it exclusively to RBI. As a result, the managements and boards of several co-operative institutions continue to reflect political interests rather than genuine co-operative spirit, and are not always amenable to normal banking discipline in their operations."

What is unsaid is the political system needs very much this sector with elections coming in some 15 months.

Interest rates on rupee export credit are to be freed, albeit May 1, 2003. In the first phase, the ceiling rate of PLR plus 0.5 percentage points on pre-shipment credit beyond 180 days and up to 270 days and post-shipment credit beyond 90 days and 180 days will go. Banks will have freedom to charge PLR or sub-PLR rates.

Should not the RBI do the same on pre and post-shipment foreign currency loans to exporters? In the last few months, exports have gone up despite an appreciation in the value of rupee proving the point that exports depend on quality rather than cheap funds.

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