The Hindu Business Line : Banking is special for its fiduciary role: Dr Reddy

Dr. Y.V. Reddy, Governor, Reserve Bank of India, addressing a press conference to announce the Annual Policy Statement for 2004-2005 in Mumbai on Tuesday. - - Shashi Ashiwal

Mumbai , May 18

DR Yaga Venugopal Reddy was quick to be casual and fling off his coat and tie soon after the 3 p.m. press conference following the announcement of the Annual Policy Statement 2004-05.

He breezed into the room on the eighteenth floor ready to explain to scribes on a one-on-one basis more about the freshly drafted policy.

This is for the first time that the RBI Governor has articulated in the policy statement requesting the Government for a policy for the banking industry. Your comments.

Banking industry is special because of the very simple fact that it has a fiduciary responsibility. Banks are allowed to take deposits without collateral. All over the world banks are special and banks in India under the Banking Regulation Act also define protection of depositors as priority.

Deregulation does not mean non-monitoring. Banks should look at it as its own responsibility, self-regulation. Governance and ownership have to be mentioned in the same breath. The policy statement is of a philosophical nature. But there should be a check on systems.

A legal and regulatory framework is going to be worked out for further licensing of urban co-operative banks (UCBs). Details please?

This is a semi-acceptance of the recommendations of an advisory committee. First, there is a need to clean up the regulatory framework in this sector (which has multiple controls).

Secondly, restructuring packages cannot be given out of deposit insurance, as was the case. The committee had suggested a regulatory framework but nothing has been worked out. In 2001, RBI had suggested that the supervision of UCBs be taken over by the Government, which was not accepted. The advisory committee said it became too difficult to give licences and suggested that UCBs first start off as credit societies. If they are found to be sound, they could then be given UCB licences.

The further enhancement of credit exposure limit to a single or group borrower by 5 per cent. Where does it take the exposure limits to now?

Infrastructure needs a lot of funding and the capital markets are not developed in this area. The Government has also withdrawn from funding and the exposure limits were constraining banks.

Some concessions were given earlier for infrastructure and each time this limit was exceeded, banks would approach RBI.

Now this was not a satisfactory state of affairs. Instead of RBI giving the exemption for which we do not have adequate information or criteria to assess, we have put in the new norms.

We want them to stick to the limit, but a headroom of 5 per cent has been given to both single and group borrowers (taking the maximum limit to 25 per cent and 55 per cent respectively in case of infrastructure).

In the case of Central Government-guaranteed projects, these limits can be overlooked.

Specific guarantees should be there for the project so that the flow of resources from banks to infrastructure does not expose depositors' money to the risks specific to that sector.

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