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Daily News RBI Credit Policies (1999-2005)
Highlights of the Mid-term Review of Annual Policy for the year 2005-06
Dr. Y.Venugopal Reddy, Governor, Reserve Bank of India has announced Mid-term Review of Annual Policy Statement for the year 2005-06 on the 25th October 2005.
The highlights of Mid-term Review of Annual Policy for the year 2005-06
are:
Developmental and Regulatory Policies
Interest Rate Policy
Indian Banks’ Association being asked to review the benchmark prime lending rate (BPLR) system and issue transparent guidelines for appropriate pricing of credit.
Financial Markets
The Reserve Bank has constituted a new department named as Financial Markets Department (FMD) in July 2005 with a view to moving towards functional separation between debt management and monetary operations.
Intra-day short selling in government securities proposed to be introduced.
NDS-OM module to be extended to all insurance entities which are mandated to invest in government securities.
Screen-based negotiated quote-driven system for call/notice and term money markets and electronic trading platform for market repo operations in government securities are being developed by Clearing Corporation of India Ltd. (CCIL).
External Commercial Borrowings
Special purpose vehicles (SPVs) or any other entity, notified by the Reserve Bank, which are set up to finance infrastructure companies/projects would be treated as financial institutions and ECBs raised by such entities would be considered under the approval route.
Banks to be allowed to issue guarantees or standby letters of credit in respect of ECBs raised by textile companies for modernistation or expansion of textile units.
Credit Delivery Mechanisms
Banks advised to fix their own targets for financing the SME sector so as to reflect higher disbursement; banks to formulate liberal and comprehensive policies for extending loans to the SME sector and rationalise the cost of loans to this sector with cost linked to credit ratings.
A debt restructuring mechanism for units in the SME sector, in line with the corporate debt restructuring (CDR) mechanism prevailing in the banking sector, has been formulated by the Reserve Bank. The performance of the CDR mechanism was reviewed and the changes to the existing CDR scheme have been finalised.
The Micro Finance Development Fund (MFDF) set up in the NABARD re-designated as the Microfinance Development and Equity Fund (MFDEF) and its corpus increased from Rs.100 crore to Rs.200 crore. The modalities in regard to the functioning of the MFDEF are being worked out.
Internal Working Group proposed to examine the whole gamut of issues and suggest suitable revisions to guidelines in regard to relief measures to be provided in areas affected by natural calamities.
Financial Inclusion
Measures proposed on credit delivery mechanisms with a view to ensuring financial inclusion of all segments of the population, in both rural and urban areas, a comprehensive framework to revive the co-operative credit system, revitalise the regional rural banks (RRBs) and reorient commercial banking towards the credit-disadvantaged sections of society.
With a view to achieving greater financial inclusion all banks need to make available a basic banking `no frills' account either with `nil' or very low minimum balances as well as charges that would make such accounts accessible to vast sections of population. All banks are urged to give wide publicity to the facility of such a `no-frills' account so as to ensure greater financial inclusion.
Prudential Measures
Bank's aggregate capital market exposure restricted to 40 per cent of the net worth of the bank on a solo and consolidated basis; consolidated direct capital market exposure modified to 20 per cent of the bank's consolidated net worth. Banks having sound internal controls and robust risk management systems can approach the Reserve Bank for higher limits.
General provisioning requirement for 'standard advances' increased from the present level of 0.25 per cent to 0.40 per cent; direct advances to agricultural and SME sectors exempted from the additional provisioning requirement.
Supervisory review process to be initiated with select banks having significant exposure to some sectors, namely, real estate, highly leveraged NBFCs, venture capital funds and capital markets, in order to ensure that effective risk mitigants and sound internal controls are in place.
General permission to banks to issue debit cards in tie-up with non-bank entities.
Institutional Developments
By end-March 2006, 15,000 branches are proposed to be covered by RTGS connectivity, and the number of monthly transactions of the system is expected to expand from one lakh to two lakh.
The National Electronic Funds Transfer (NEFT) system would be implemented in phases for all networked branches of banks all over the country.
The pilot project for Cheque Truncation System is expected to be implemented in New Delhi by end-March 2006.
National settlement system (NSS) to enable banks to manage liquidity in an efficient and cost effective manner to be introduced in the four metropolitan centres by end-December 2005.
New company for retail payment systems proposed to be set up under Section 25 of Companies Act; to be owned and operated by banks and likely to get operational from April 1, 2006.
Banks urged to test their business continuity plans periodically.
Currency chest facility and licence to conduct foreign exchange business (authorised person licence) to scheduled UCBs registered under the Multi-State Co-operative Societies Act and under the State Acts where the State Governments concerned have assured regulatory coordination by entering into MoU with the Reserve Bank.
Acquirer UCB to be permitted to amortise the losses taken over from the acquired UCB over a period of not more than five years, including the year of merger.
Details of the scheme regarding implementation of the provisions of the Right to Information Act, 2005 have been placed on the Reserve Bank's website.
The Reserve Bank has recently updated its nominal effective exchange rates (NEER) and real effective exchange rates (REER) indices. The new 6-currency indices and the revised 36-country indices of NEER and REER would be published in the the Reserve Bank of India Bulletin of December 2005.
The Third Quarter Review of Part I of the annual policy to be undertaken on January 24, 2006
<<< Back To MAIN PAGE OF Mid-term Review of Annual Policy for the year 2005-06
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