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April 26, 2000
CREDIT POLICY 2000
RBI may shore up debt market, beautify banking system
The Monetary and Credit Policy of the Reserve Bank of India, or RBI, to be announced on April 27, is being seen in banking circles as a document that will not make any radical alterations and effect only cosmetic changes in the banking system.
With the RBI having effected major cuts in bank rate and cash reserve ratio on April 1, the bankers' prediction seems quite logical. They do not foresee any action on interest rates or liquidity now, but expect that the RBI governor Bimal Jalan may go in for micro-level policy adjustments in a bid to move towards a healthier system.
There is also a view that the RBI may take a sympathetic view of the prevailing drought conditions in states like Gujarat, Rajasthan and Andhra Pradesh and may do something to improve the flow of credit to rural areas.
The RBI, however, is likely to concentrate on fine-tuning the system and deepening the Indian debt markets, bankers say. The central bank may also simplify regulations relating to the issue of commercial paper for corporates.
Another section of bankers feels that tougher norms are in store for bank investments in long-term debentures and privately placed bonds.
Tightening of non-government debt investments norms, widening of the repurchase market, and moving towards market-related refinancing rates are some of the steps that seem to be on cards, bankers say. These steps, if taken, could give a significant fillip to the commercial paper placement mart in the country.
Indian companies are allowed to issue commercial paper up to 100 per cent of their cash credit limit, which is the short-term working capital requirement of firms and is issued by banks.
The new policy may also let banks and primary dealers underwrite primary commercial paper issues by top-rated corporates, say bankers. The RBI does not allow underwriting of commercial papers at present.
The development of the debt markets gains serious importance with the Indian government planning to borrow over Rs 1.10 trillion from the markets during the current fiscal.
Analysts say that the move will offer a disciplined approach towards debt investments made by banks.
The RBI, while issuing draft guidelines on banks' investments recently, had also expressed concern over the quality of banks' non-SLR portfolios since it largely comprised privately placed unquoted securities. Bankers expect some announcement on this front, too. (SLR = statutory liquidity ratio. Banks in India are required to maintain 25 per cent of their demand and time liabilities in government securities and certain approved securites. These are collectively known as SLR securities. The buying and selling of these securities was the seed of the 1992 scam.)
The central bank had declared the draft guidelines for bank investment in privately placed corporate bonds, laying down conditions for when a bank's investment in a bond should be treated as a loan. These specifications are likely to be finalised by the RBI in its policy statement.
The RBI's draft guidelines said that bonds with a tenure of five years or more -- issued as part of a proposal for a long-term project and in which the bank's investment constitutes more than ten per cent of the issue -- should be treated as loans.
This forced banks to provide more towards such investments than is being done at the moment.
Investment bankers believe that the guidelines will lead to more 'due diligence' by banks before they invest in such bonds. It will also discourage banks from investing in unrated bonds, say bankers.
At present, the RBI offers refinance at 7 per cent and 9 per cent to banks and primary dealers against their holdings of government bonds and loans to exporters.
Instead of the refinancing facility, the RBI is expected to hold daily auctions of reverse repurchase agreements to instill more liquidity into the markets.
Bankers also expect the RBI to announce steps to widen the repurchase market. This, analysts feel, can be done by persuading corporates and institutions to play in the repo market, thereby improving liquidity in bonds and deepening the market. (Repo: repurchase agreements or ready forward deals, a secured short term -- usually 15-day -- loan by one bank to another against government securities. Legally, the borrower sells the securities to the lending bank for cash, with the stipulation that at the end of the borrowing term it will buy back the securities at a slightly higher price, the difference in price representing the interest.)
This will also result in the inter-bank call money market becoming a mart just for banks and primary dealers, bankers opine.
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