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Second Quarter Review of the Monetary Policy for 2010-11
Press Statement by Dr. D. Subbarao, Governor- 2nd November 2010

24. I will highlight a few measures, we have taken or plan to take in these areas.

Financial Stability

Releasing the second financial stability report in December 2010. Going forward, financial stability report will be published in June and December every year.

Interest Rates

Preparing a discussion paper, which will delineate the pros and cons of deregulating the savings bank deposits interest rate. Financial Market Products

Permitting settlement of repo in corporate bonds on a T+0 basis in addition to the existing T+1 and T+2 basis. Credit Delivery and Financial Inclusion

Allowing regional rural banks (RRBs) to open branches in tier 3 to tier 6 centres as identified in the Census 2001(with population up to 49,999), subject to fulfilling certain conditions.

Opening sub-offices of the Reserve Bank in the remaining six states of the North East, viz., Arunachal Pradesh, Nagaland, Manipur, Mizoram, Tripura and Meghalaya, in a phased manner.

Initiating several measures to strengthen the role of urban co-operation banks (UCBs) such as:

extending area of their operations;

liberalising branch licensing policy for well managed and financially sound UCBs;

allowing well managed and financially sound UCBs to engage business correspondents (BCs)/business facilitators (BFs);

allowing licensed UCBs the facility of INFINET membership, current and SGL accounts with the Reserve Bank; and

allowing RTGS membership to well managed and financially sound UCBs having a minimum net worth of ` 25 crore.

Regulatory Measures

Prescribing the loan to value (LTV) ratio of not exceeding 80 per cent in respect of housing loans hereafter.

Increasing the risk weight for residential housing loans of ` 75 lakh and above, irrespective of the LTV, to 125 per cent.

Increase the standard asset provisioning by commercial banks for all housing loans with teaser rates to 2 per cent.

Stipulating prudential limits to regulate the investments of banks in companies engaged in forms of business other than financial services. Banks will be required to review their investments in such companies and be compliant with the guidelines as per the roadmap to be laid down.

Implementing the recommendations of the Internal Group on Supervision of Financial Conglomerates (FCs) on (i) capital adequacy for FCs; and (ii) intra-group transactions and exposures in FCs.

Taking appropriate steps to fully align the corporate governance practices in banks in India with the principles enunciated by the Basel Committee on Banking Supervision (BCBS).

Issuing final guidelines on compensation practices by banks by end-December 2010.

Putting the draft guidelines on licensing of new banks in public domain by end-January 2011 for public comments.

Institutional Measures

Increasing the threshold limit for real time gross settlement system (RTGS) transactions from the present limit of ` 1 lakh to ` 2 lakh.

Accepting the report of the Group on next generation RTGS.

Planning the next roll out of cheque truncation system in March 2011 at Chennai.

Discussions with banks

25 Banks welcomed the Reserve Bank’s policy stance. They agreed that the monetary measures announced by the Reserve Bank today were appropriate in the current domestic growth-inflation dynamics. Apart from monetary measures, discussions with banks focused on four specific issues, i.e., (i) liquidity situation; (ii) housing credit, price and risk; (iii) customer service; and (iv) external sector management. While appreciating the liquidity easing measurers announced recently, banks indicated that steps are required to ease structural liquidity. Welcoming the stipulation of the loan to value ratio and increased risk weight in housing loans, some banks felt that the practice of offering lower interest rates in the initial period of housing loans cannot be equated with teaser loans as the risk in such loans is not different from those offered at floating rate loans. Banks reiterated that they will continue to strive for improved customer service. Banks shared the Reserve Bank’s concern that the component of stable capital flows in the overall flows should be increased to address the concerns of financing the widening current account deficit."

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An analytical review of macroeconomic and monetary developments: Second Quarter Review 2010-11, was issued on 26th July 2010, which serves as a background to the Second Quarter Review of Monetary Policy 2010-11. ...Click Here

Full Text of Second Quarter Review of the Monetary Policy for 2010-11....Click Here

Mixed reactions from Banks, Economists, India Inc on RBI Annual Policy ....Click Here

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