Mid-Term Review of
Monetary and Credit Policy for the year 2000-2001: SPECIAL FEATURE
From the banknetindia team
The announcement on CRR and Bank rate was in line with market expectations. RBI had hiked CRR and Bank rate in August'2000 to counter the volatility in foreign exchange market the time when INR came under severe pressure due to external factors like crude prices. With exchange rate still volatile there was very little scope for rolling back the earlier measures and any hike would have hit the sentiments also impacted the pick up in industrial activity. Government borrowing programme of-course continues to be another area of concern.
Restoration of the EEFC accounts will help exporters to save transaction costs, but they will not able to take advantage of keeping their dollar proceeds abroad to speculate on the exchange rate as the funds would be kept in a non-interest bearing current account. Exporters also will not be allowed to raise bank loans using the foreign exchange as collateral. Considering the holding cost it would not make much business sense for exporters to maintain large balances in EEFC unless the markets are volatile and expected depreciation of INR exchange rate can compensate for the opportunity cost.
The new valuation norms will help the banks as their balance sheet are heavily hit by the rising yield of the government securities as under the new guidelines. The banks that have marked-to-market more than 75 per cent of their portfolio are permitted to reorganise their portfolio under the new classification. This will allow banks to shift some of their marked-to-market investment to the held to maturity category.
The central bank has proposed to include the general provision on standard assets in Tier-II capital. The new provision will be a welcome relief to most of the banks, as provisions made on the assets are actually a charge on the assets. The general provision on standard assets, which would now qualify for Tier II capital, will provide some help to banks in meeting their capital adequacy requirements.
Maintenance of additional capital and inclusion of risk-weighted assets of the subsidiaries into the balance sheet of the parent bank is a welcome step towards corporate governance. This forces the banks to closely monitor the financial performance of their subsidiaries and demand a respectable return on their capital funds. This is a beginning towards consolidated supervision of banks.
A new development is the permission given to FIs to issue commercial paper, which gives them one more instrument to raise short-term funds. The de-linking of commercial papers (CPs) from bank finance limit is expected to boost liquidity and add flexibility to the market.
Also, the possibility of transferring CD's within the 15 day lock-in period will allow banks to compete for short term (mostly corporate) funds against the mutual funds which do not suffer a lock-in period. CD now makes it a strong instrument of inner-market equilibration, especially in developing the secondary markets.
The proposed securitisation of assets by banks, extension of bill discounting facility to the services sector, especially IT, software, etc, will lend flexibility to banks operations, while the guidelines for bank financing of equities and investment in shares will provide a fillip to the stock markets.
Screen-based trading in government securities will not only add transparency and efficiency to trading, but also help widen the market and add depth in vibrancy.
The automatic invocation by the SGL account holder of the RBI liquidity support for securities settlement, allowing allotted primary issues of the securities to be sold on the same day and the efforts towards setting up of the clearing corporation will improve structural flexibility of the markets. These moves will be further strengthened by the introduction of order-driven, screen-based trading in govt. securities.
The abolition of the past due concept will deny banks the possibility of delaying provisioning for bad debts by 30 days.
A working group has been set up to identify risks in internet banking and suggest adequate security systems, in conformity with international standards, which could be adopted by banks in India. This initiative will help the growth of Internet banking in the country.
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