Governor said that while the emphasis at this stage is on reinforcing corporate governance within financial institutions, the focus is also on enhancing the credit delivery mechanism, facilitating ease of transactions by the common person and continuously working towards consolidating the gains of the financial sector reforms by further broadening the consultative process.
Monetary Measures
(a) Bank Rate ─ Kept unchanged at 6.0 per cent.
(b) Repo Rate
In view of the current macroeconomic and overall monetary conditions, it has been decided:
• To increase the fixed repo rate by 25 basis points under the liquidity adjustment facility (LAF) of the Reserve Bank effective from October 27, 2004 to 4.75 per cent from 4.50 per cent.
The reverse repo rate will continue to be linked to the repo rate, as at present. However, the spread between the repo rate and the reverse repo rate is reduced by 25 basis points from 150 basis points to 125 basis points. Accordingly, the fixed reverse repo rate under LAF will continue to remain at 6.0 per cent.
As already announced, it is proposed to switchover to the international usage of the terms ‘repo’ and ‘reverse repo’ effective October 29, 2004. With such a switchover, the fixed reverse repo rate will be 4.75 per cent and the repo rate will be available with a spread of 125 basis points at 6.0 per cent.
(a) Revised Liquidity Adjustment Facility
With a view to enhancing further the effectiveness of LAF and to facilitate liquidity management in a flexible manner, it is proposed that:
• Liquidity adjustment facility (LAF) scheme would be operated with overnight fixed rate repo and reverse repo with effect from November 1, 2004. Accordingly, auctions of 7-day and 14-day repo (reverse repo by international parlance) would stand discontinued from November 1, 2004.
Interest Rate Policy
(a) Ceiling on Interest Rates on NRE Deposits
With a view to aligning interest rates on Non-Resident (External) Rupee (NRE) deposits with international interest rates, ceiling on NRE deposit rates was linked to the US dollar LIBOR/SWAP rates of corresponding maturities. On a review, it is proposed:
• To raise the ceiling on NRE interest rates to LIBOR/SWAP rates of US dollar of corresponding maturities plus 50 basis points from the existing level of US dollar LIBOR/SWAP rates.
(b) Fixation of Interest Rates on FCNR(B) Deposits
Based on the suggestions received from banks and with a view to bringing in consistency in the procedure of fixing interest rates, it is proposed that:
• Banks may fix the ceiling on interest rates on FCNR(B) deposits on monthly basis for the following month based on rates prevailing as on the last working day of the preceding month. The ceiling interest rates on FCNR(B) deposits, however, would continue to be at LIBOR/SWAP minus 25 basis points as hitherto.
(c) Reduction of Tenor of Domestic Term Deposits
In order to provide uniformity in the tenor of term deposits, it is proposed that:
• Banks, at their discretion, can reduce the minimum tenor of retail domestic term deposits (under Rs.15 lakh) from 15 days to 7 days.
Credit Delivery Mechanism
(a) Service Area Approach: Removal of Restrictive Provisions
With a view to facilitating banks to improve their credit delivery mechanism, it is proposed:
• To dispense with the restrictive provisions of service area approach except for government sponsored programmes.
(b) Priority Sector Lending
(i) Enhanced Lending to Agriculture and Distribution of Inputs
With a view to further improving credit delivery to the agriculture sector, it is proposed:
• To increase the limit on advances under priority sector for dealers in agricultural machinery from Rs. 20 lakh to Rs.30 lakh and for distribution of inputs for allied activities from Rs.25 lakh to Rs.40 lakh.
(ii) Enhanced Lending to Small and Marginal Farmers
In order to improve flow of credit to small and marginal farmers, it is proposed that:
• Banks should make efforts to increase their disbursements to small and marginal farmers to 40 per cent of their direct advances under special agricultural credit plans (SACP) by March 2007.
(iii) Special Agricultural Credit Plans
In order to enhance flow of credit to agriculture, it is proposed to extend the SACP mechanism to private sector banks. Accordingly:
• All private sector banks are urged to formulate special agricultural credit plans from the year 2005-06, targeting an annual growth rate of at least 20-25 per cent of credit disbursements to agriculture.
(iv) Enhancement of Composite Loan Limit to SSI Units
In order to facilitate smooth flow of credit to SSIs, it is proposed:
• To enhance the composite loan limit for SSI entrepreneurs from Rs.50 lakh to Rs.1 crore.
(v) Investment by Banks in Securitised Assets Pertaining to SSI Sector
In order to encourage securitisation of loans to SSI sector, it is proposed that:
• Investments made by banks in securitised assets representing direct lending to the SSI sector would be treated as their direct lending to SSI sector under priority sector, provided the pooled assets represent loans to SSI sector which are reckoned under priority sector and the securitised loans are originated by banks/financial institutions.
(vi) Housing Loan: Enhancement of Ceiling
In order to further improve flow of credit to the housing sector, it is proposed that:
• Banks, with the approval of their Boards, may extend direct finance to housing sector up to Rs.15 lakh, irrespective of location, as part of their priority sector lending.
(c) Financing of Distressed Urban Poor
With a view to bringing in urban poor into formal financial system, it is proposed that:
• Banks may advance loans to distressed urban poor to prepay their debt to non-institutional lenders, against appropriate collateral or group security.
(d) Micro-finance
As per announcement in the Union Budget for 2004-05, credit linking of 5.85 lakh SHGs needs to be completed by March 2007. Specific steps are being taken to identify district level bottlenecks in regions where linkage has been relatively low.
(e) Kisan Credit Card Scheme: Follow-up of Survey
With a view to further improving the flow of credit to agricultural sector under the KCC scheme, IBA has been advised to look into the suggestions made by NCAER as part of its national impact assessment survey and take remedial action.
(f) Rural Infrastructure Development Fund: Status
As announced in the Union Budget for 2004-05, RIDF X has been established with a corpus of Rs.8,000 crore.
(g) Debt Restructuring Mechanism for Medium Enterprises
A Special Group (Chairman: Shri G. Srinivasan) constituted to formulate a mechanism for restructuring the debt of medium sector enterprises is expected to submit its Report soon which will be placed in the public domain.
(h) Regional Rural Banks
The Reserve Bank has constituted Empowered Committees in its Regional Offices with members drawn from NABARD, sponsor banks, conveners of SLBCs and state governments to ensure that the RRBs adhere to good governance and comply with prudential regulations. The Committees would also focus on operational issues and provide clarifications on regulatory issues.
(i) Revival of Rural Co-operative Banks: Status
The Government has appointed a Task Force (Chairman: Prof. A. Vaidyanathan) to propose an action plan for reviving the rural co-operative banking institutions and suggest an appropriate regulatory framework for these institutions. The Task Force is expected to submit its Report shortly.
(j) Lending to Agriculture: Review of Progress
Pursuant to the announcement by the Government of a package of measures on June 18, 2004, RBI and IBA issued guidelines to commercial banks, while NABARD issued similar guidelines to co-operative banks and RRBs. While the progress is encouraging, banks are urged to keep up the momentum.
(k) Liberalisation of Bank Finance to NBFCs
In view of the expertise gained by NBFCs in financing second hand assets and to encourage credit dispensation, it is proposed that:
• Banks may, henceforth, extend finance to NBFCs against second hand assets financed by them, provided suitable loan policies duly approved by the banks’ Boards are put in place.
(l) Gold Card Scheme for Exporters: Status
Most of the public sector banks and many private sector and foreign banks have since announced guidelines on gold card scheme for creditworthy exporters offering better terms of credit and rates to the gold card holders.
(m) Report of Working Group on Credit Enhancement by State Governments
The Working Group on Credit Enhancement by State Governments is examining the instruments which the state governments could offer to improve the rating/borrower capability of state PSUs/SPVs in order to attract institutional financing for infrastructure projects. The Group is expected to submit its Report shortly.
Money Market
(a) Moving towards Pure Inter-bank Call/Notice Money Market
In view of further market developments as also to move towards a pure inter-bank call/notice money market, it is proposed that:
• With effect from the fortnight beginning January 8, 2005, non-bank participants would be allowed to lend, on average in a reporting fortnight, up to 30 per cent of their average daily lending in call/notice money market during 2000-01.
(b) Commercial Paper
With a view to developing the commercial paper (CP) market further, after taking into account the suggestions and market response, the following measures are proposed:
• In order to provide an option to issuers to raise short-term resources through CP as also an avenue to investors to invest in quality short-term papers, the minimum maturity period of CP is reduced from 15 days to 7 days with immediate effect.
• In order to provide transparency and also facilitate benchmarking of CP issues, issuing and paying agents (IPAs) would report issuance of CP on the negotiated dealing system (NDS) platform by the end of the day. The date of commencement of reporting would be finalised in consultation with market participants.
• With a view to moving towards settlement on T+1 basis, a Group comprising market participants would be constituted to suggest rationalisation and standardisation in respect of processing, settlement and documentation of CP issuance.
(c) Collateralised Borrowing and Lending Obligation
Automated value-free transfer of securities between market participants and the CCIL was facilitated to further develop the collateralised borrowing and lending obligation (CBLO) segment.
Classification of Cost
