Mid-Term Review of the Annual Policy Statement for 2006-07, RBI Credit Policy: Banknet India

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Part II. Mid-term Review of Annual Statement on Developmental and Regulatory Policies for the Year 2006-07

78. Financial stability has assumed priority in the hierarchy of objectives of the Reserve Bank in the context of elevated asset prices, rapid growth in bank credit and heightened appetite for risk in an environment of ample liquidity despite sizeable re-pricing of risks in more recent months. Accordingly, the quality of financial assets and the state of financial market conditions have also become important concerns in the formulation and setting of monetary policy. The Annual Policy Statement of April 2006 emphasised financial stability in its stance and sought to draw upon the strong complementarity between macroeconomic and financial stability. It noted that separate coverage of monetary, and developmental and regulatory policies enhances clarity and transparency in communication; yet, it observed, it is important to adopt a holistic approach that exploits the synergies between the responsibility for price and financial stability and regulatory policies in order to secure high growth with stability. Keeping in view the overall macroeconomic conditions and the possibilities of global risk factors materialising, the Annual Policy Statement strengthened prudential norms in the sectors recording high credit growth. Banks were provided with additional avenues for raising capital through innovative instruments to augment their capital base. Banks were also encouraged to undertake sound stress testing practices for assessment of capital adequacy. The First Quarter Review of July, 2006 urged banks to focus on mobilisation of retail deposits, stricter credit appraisals on sectoral basis, and to ensure the health of credit portfolios on an enduring basis. It retained and reinforced the emphasis on financial stability set out in the Annual Policy Statement.

79. It has been the endeavour of the Reserve Bank to develop sound and efficient intermediaries and markets so as to provide foundations for a robust, efficient and diversified financial system, a key requisite for effective transmission of monetary policy. Efforts are being made to evolve a system that will detect sources of vulnerability early and trigger corrective strategies. In this context, the importance of communication has increased and the Reserve Bank has adopted a participative and consultative process in the conduct of its developmental and regulatory policies. The process is becoming broad-based with wider involvement of all stakeholders and emphasis on financial inclusion as well as financial education. It is not just confined to transparency but also encompasses financial education that should foster a more informed evaluation of policies.

80. The main focus of the Mid-term Review is on select areas. First, it is proposed to further develop and integrate financial markets with a view to enhancing allocative efficiency. Second, ongoing efforts to improve and expand credit delivery would be oriented towards financial inclusion and extension of financial services to the under-privileged segments of the population. Third, strengthening the capital base of banks with a view to preparing them to migrate to Basel II norms, putting in place the appropriate financial architecture for risk management and implementing prudential measures in consonance with international best practices in the financial sector continues to assume high priority. Fourth, consistent with the sweeping changes in India and the global economy in the recent period, the pace of gradual liberalisation of the external sector needs to be kept up within the framework for fuller capital account convertibility recommended by the Committee appointed by the Reserve Bank with the objectives of promoting economic growth, improving financial sector efficiency and providing opportunities for diversification of investments by residents.

81. The Mid-term Review of Developmental and Regulatory Policies for the year 2006-07 is divided into four sections:

I. Financial Markets... Click Here

II. Credit Delivery Mechanism and Other Banking Services... Click Here

III. Prudential Measures... Click Here

IV. Institutional Developments... Click Here