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Banking > Policies>
Mid-Term Review of Monetary and Credit Policy 1999-2000 > Part III

Financial Sector Reforms and Monetary Policy Measures

Monetary and Credit Policy Measures
In the light of the macro-economic and monetary policy developments reviewed in the previous sections, it is proposed to make the following changes in policy :

  1. The Cash Reserve Ratio (CRR) maintained by the scheduled commercial banks is being reduced by one percentage point from the present level of 10 per cent to 9 per cent in two instalments, the first, effective the fortnight beginning November 6, 1999 and the next, effective the fortnight beginning November 20, 1999. This will increase the lendable resources of banks by Rs.7,000 crore. In order to improve the cash management by banks, as a measure of simplification, it has been decided to introduce a lag of two weeks in the maintenance of stipulated CRR by banks. This change in the procedure for calculation of reserve maintenance will be effective from the fortnight beginning November 6, 1999.
  2. The interest rate surcharge of 30 per cent on import finance, which has been in force since January 1998, is being withdrawn with immediate effect. This will reduce the financing cost of imports for industry.
  3. At present, banks are required to charge a minimum rate of 20 per cent interest on overdue export bills. This stipulation is also being withdrawn with immediate effect, and banks will henceforth have the freedom to decide the appropriate rate of interest on overdue export bills. However, the present procedures for ensuring that there is no deliberate attempt to delay repatriation of export receipts will remain in force.
  4. In line with the policy of minimising the country's short-term external borrowing liabilities, the minimum maturity for FCNR(B) deposits is being raised to one year from six months. Banks, however, will continue to have the freedom to offer floating rate deposits (with a maturity of one year or more, and interest reset period of six months). At the same time, the requirement by banks to maintain an incremental CRR of 10 per cent on increase in liabilities under FCNR(B) Scheme (over the level prevailing as on April 11, 1997) is being withdrawn, with effect from the fortnight beginning November 6, 1999. This will increase the lendable resources of banks by Rs.1,061 crore.


As emphasised in the earlier Policy Statements, it is reiterated that the above measures, including the level of the CRR to be maintained by banks, are subject to change from time to time.

In the last few years, following the Reports of high level Committees (such as the Narasimham Committee) and various technical groups and working groups, the Reserve Bank has announced a number of measures for the development and reform of the financial sector, including money and debt markets. An attempt is made here to review the development in respect of certain measures announced in April 1999 with a view to bring about modifications where necessary. Interim Liquidity Adjustment Facility (ILAF)

This facility, announced in the April Statement, has provided a mechanism for injection and absorption of liquidity available with banks from time to time. The ILAF is operated through a combination of repo, export credit refinance, collateralised lending facilities and open market operations. The experience in operating this facility in the last six months has generally been satisfactory and substantial use has been made of export credit refinance and collateralised lending facilities under this scheme in order to overcome mismatches in the supply and demand for liquid funds. The fortnightly average utilisation under this facility including export credit refinance has ranged between Rs.4,119 crore and Rs.7,697 crore during April-October 1999. Primary dealers also availed of liquidity support in the range of Rs.1,293 crore and Rs.7,406 crore during the same period. In the light of the feedback received from the market participants, in the first week of this month, the scheme was made more flexible by removing the requirement of `cooling period' (after the use of this facility by banks for two blocks of two weeks each). The operation of this facility will be kept under constant review and further refined in consultation with participants.

Money Market

An important step announced in April 1999 in the direction of development of the money market was the introduction of rupee derivative products (Forward Rate Agreements/Interest Rate Swaps). The guidelines issued in this respect have been widely welcomed by the market participants and at present the notional principal amount of outstanding of FRAs/IRS is around Rs.1,700 crore. It is expected that the volumes in the market will pick up over time, once banks and institutions complete the documentation formalities.

The April statement announced certain facilities for enabling non-bank participants to deploy their short-term resources in the repo market and for development of Money Market Mutual Funds (MMMFs). After a review of the working of the measures announced in April, the following modifications/measures are being introduced in the operation of various money market schemes :
i. It was indicated in the April 1999 policy statement that the permission given to non-bank entities to lend in the call/notice money market by routing their call/notice money market operations through primary dealers will be available only upto end-December 1999. On a review, it has been decided to extend this facility upto end-June 2000.
ii. Money Market Mutual Funds (MMMFs) which exclusively invest in money market instruments are governed by the MMMF guidelines issued by the Reserve Bank of India. On a review, it is felt that from the angle of a consistent policy with regard to investor protection, it would be desirable to bring the MMMFs under the umbrella of SEBI Regulations, like other Mutual Funds. Accordingly, henceforth, MMMFs will come within the purview of SEBI Regulations. Once SEBI Regulatory framework for MMMFs is in place, RBI would withdraw its guidelines and advise banks/financial institutions that in future, MMMFs would be governed by SEBI regulations. However, banks and financial institutions desirous of setting up MMMFs will have to seek necessary clearance from RBI for undertaking this additional activity before approaching SEBI for registration.
iii. At present, Money Market Mutual Funds (MMMFs) can be set up either departmentally in the form of a Money Market Deposit Account (MMDA), or as a separate entity, viz., a 'Trust'. For operational convenience, it has been decided to henceforth allow MMMFs to be set up as a separate entity in the form of a 'Trust' only. As the banks to whom 'in-principle' approvals were already given have not so far operationalised MMDAs, RBI proposes to withdraw the permission already granted after consulting them.
iv. It has been decided to permit scheduled commercial banks to offer 'cheque writing' facility to Gilt Funds and to those Liquid Income schemes of mutual funds which predominantly invest in money market instruments (not less than 80 per cent of their corpus) subject to the same safeguards prescribed for Money Market Mutual Funds. Operating guidelines to banks are being issued separately.
v. With a view to providing further flexibility in the use of FRAs/IRS, it has been decided to permit mutual funds, in addition to corporates, to undertake FRAs/IRS with banks, primary dealers and financial institutions for the purpose of hedging their own balance sheet risks. Mutual funds cannot, however, undertake market making in FRAs/IRS.
vi. With a view to facilitating flow of information and transparency in the functioning of money markets, Reserve Bank proposes to work out in consultation with market participants, modalities of releasing on a daily basis, data on volume and rates in call money market as well as some other relevant data. This will enable market participants to gauge liquidity conditions more effectively and contribute to smooth functioning of the short-term markets, in particular the call/notice money market.

Government Securities Market :
On the basis of announcements made in the April policy, the following measures have been taken with the objective of improving depth and liquidity in the government securities market :

  • Price based auction of government dated securities.
  • Auction of 182 day Treasury Bills.
  • A calendar of Treasury Bills issuance.
  • Availment of ways and means advances by State Governments against collateral of Treasury Bills, in addition to Government of India dated securities.
  • Minimum bidding commitment of Primary Dealers (PDs) to cover 100 per cent of notified amounts in Treasury Bills auctions.
  • Underwriting of dated securities issues by PDs upto 100 per cent of the notified amounts.
  • Entry of non-banking entities in the two way repos market.


These measures have generally been received well by the market participants and are working satisfactorily. The following action is in progress to further strengthen the development of the market:

  • In regard to developing the retail market segment, a Working Group is being constituted to analyse all related aspects of retailing government securities and make recommendations for improving the retail segment of the market.
  • An Internal Working Group has been constituted to go into various aspects relating to two-way operations by RBI in the Treasury Bills market.
  • Arrangements relating to clearing corporation are under consideration which will pave the way for opening the repo market to PSU bonds and bonds of FIs held in demat form in depositories and traded in recognised stock exchanges with essential safeguards. As a part of this, detailed guidelines to widen further the number of participants in the repos market through exchange traded repos with adequate safeguards to manage risks will also be finalised.
  • It has been decided to publicise gilt instruments through informative pamphlets.
  • It has been decided to advise PDs that they should have self-imposed reasonable leverage ratios with the consent of their Board of Directors.


Review of Norms Relating to Prime Lending Rates
Currently, loans upto Rs.2 lakh carry the prescription of 'not exceeding PLR' and on loans above Rs.2 lakh, the PLR is the minimum lending rate. A set of measures was announced in the April Statement to provide more operational flexibility to banks in the applicability of PLR. Keeping in view the suggestions received from banks and other market participants, the existing PLR norms have been further reviewed and it has been decided that banks will be given the freedom to charge interest rates without reference to PLR, in respect of the following categories :

  • Loans covered by refinancing schemes of term lending institutions.
  • Lending to intermediary agencies.
  • Discounting of bills.
  • Advances/Overdraft against domestic/NRE/FCNR(B) deposits.


The present position and the proposed changes are indicated in the Annexure I.

Prudential Norms
In order to strengthen the financial system, an important priority in the past few years has been to introduce appropriate norms in respect of capital adequacy, income recognition and provisioning. An attempt has also been made to move towards full disclosure, transparency and effective supervision of banking operations in line with international best practices. It is expected that effective implementation of measures in these areas would help in not only strengthening the financial sector but also providing support to the growth of the real economy. As further steps in these directions, the following measures are being notified:
i. In the Mid-term Statement on Monetary and Credit Policy for 1998-99, a risk weight of 2.5 per cent was introduced for the risk arising out of market price variations for investments in government and other approved securities, with effect from the year ending March 31, 2000. In view of the growing share of investments in the assets of banks, the risk weight of 2.5 per cent is being extended to cover all investments including securities outside the SLR. This, however, will take effect from the year ending March 31, 2001.
ii. As of now, a bank's exposure to an individual borrower is subject to a prudential ceiling of 25 per cent of the bank's capital funds. The In-House Working Group constituted by the Reserve Bank in 1998 to review the present exposure norms, had recommended moving closer to the international standard of 15 per cent, in phases. Accordingly, it has been decided to lower the exposure ceiling in respect of an individual borrower from the present level of 25 per cent to 20 per cent of the bank's capital funds effective April 1, 2000. Where the existing level of exposure as on October 31, 1999, is more than 20 per cent, banks would be expected to reduce the exposure to 20 per cent of capital funds over a two year period (i.e., by end October, 2001). Valuation of Investments in Approved Securities

It was announced as part of the April Statement that with effect from the year ending March 31, 2000, banks will have to classify a minimum of 75 per cent of their investments in Government and other approved securities as `Current Investments'. An `Informal Group on Valuation of Banks' Investments Portfolio', set up by the Reserve Bank, has recently studied all aspects relating to valuation of investments in the light of international practices and has recommended that banks may classify their investments into three categories viz., `Held for Trading', `Available for Sale' and `Permanent'. The Group has suggested norms for classification as also changes in accounting procedures. The Group has also recommended for discontinuation of the RBI's practice of prescribing year end YTMs for valuation purposes. The summary of Group's recommendations is provided in Annexure II. The Group's report will be circulated among banks for comments and also placed before the Board for Financial Supervision for advice. Thereafter, a final decision will be taken on the procedure for valuation of investments with effect from April 1, 2000.

Credit Delivery
Banks and financial institutions have been entrusted with special responsibilities for providing credit on reasonable terms to certain sectors, particularly, agriculture, exports, micro-credit institutions, small-scale industries and housing. In addition to improving the terms and volume of assistance to these sectors, an important priority is to improve and simplify procedures, reduce documentation requirements and decentralise decision making to branch levels. Surveys have shown that simplification and decentralisation of credit delivery mechanisms are just as important in improving access to credit as preferential interest rates or policy directives. The Reserve Bank has held review meetings with the Chief Executives of banks to ensure that simplified procedures are actually being implemented at the ground level. It is proposed to hold such review meetings at regular intervals, and to encourage banks to set up internal systems to ensure effective implementation of simplified procedures.

Another area where banks and financial institutions can play an important role is that of infrastructure financing. After extensive consultation, RBI introduced in April, 1999 new guidelines to accelerate credit disbursement in infrastructure. These guidelines addressed important aspects relating to the financing of infrastructure projects, such as, the criteria for financing, the types of financing, the appraisal, the regulatory compliance/ concerns, the administrative arrangements and the inter-institutional guarantees, among others. Financing of infrastructure projects is characterised by large capital costs, long gestation period and high leverage ratios. In order to facilitate free flow of credit to infrastructure projects, several policy measures have already been effected by RBI. The stipulation regarding the ceiling on the quantum of term loans which can be granted by banks for a single project (Rs.1,000 crore for power projects and Rs.500 crore for other projects) has been dispensed with; banks can now sanction term loans to infrastructure projects within the overall ceiling of the prudential exposure norms. Subject to certain safeguards, banks are also permitted to exceed the group exposure norm of 50 per cent, to the extent of 10 per cent, provided the additional exposure is for the purpose of financing infrastructure projects. It is proposed to review the operation of these new guidelines after one year of operation (i.e., May, 2000), and make such changes as may be required to promote further financing of infrastructure.

In order to facilitate co-ordination and resolution of issues relating to projects assisted jointly by banks and development financial institutions, a Standing Co-ordination Committee has now been set up by the Industrial Development Bank of India. It is expected that this Committee will help in improving co-ordination and reducing delays in providing credit to infrastructure and other sectors.

Housing Finance
Banks have an important role to play in providing credit to the housing sector in consonance with the National Housing Policy. From time to time, new measures have been announced to increase the flow of bank finance to this sector. At present, banks are required to allocate towards housing finance to the extent of 3 per cent of incremental deposits. With a view to providing more flexibility to banks to increase the flow of credit, directly and indirectly through intermediary agencies including Housing and Urban Development Corporation and National Housing Bank, some changes in the norms for determining the housing finance allocation by banks are being introduced. Details are provided in Annexure III.

Micro Credit As indicated in the April Policy Statement, Micro Credit Institutions and Self Help Groups (SHGs) are important vehicles for generation of income and delivery of credit to self employed persons, particularly women, in rural and semi-urban areas. Banks have since been advised to include flow of micro credit in their corporate strategy/plan and to review the progress on a quarterly basis. As announced in the April statement, RBI has set up a special Micro Credit Cell to review the ground realities and in consultation with NABARD and reputed micro-credit institutions, suggest measures to remove any remaining policy and procedural bottlenecks for "mainstreaming micro credit". The objective is to accelerate the flow of bank credit to micro finance institutions without jeopardising their decentralised, voluntary and non-bureaucratic character. The Cell is expected to complete its field work, and submit findings, within a year. A high level Task Force on Supportive Policy and Regulatory Framework for Micro Finance set up by NABARD has also recently submitted its report to NABARD. The recommendations made by the Task Force are being processed by NABARD in consultation with RBI and Government as appropriate. Non-Banking Financial Companies (NBFCs)

RBI has instituted a comprehensive regulatory and supervisory framework for the NBFC sector in January 1998, pursuant to the amendments effected to the Reserve Bank of India Act, 1934. As part of the consultative process, RBI has constituted an Informal Advisory Group consisting of representatives of the NBFC sector. While helping orderly growth of this important sector, steps are also being taken to increase investors' awareness of their own responsibility in regard to investments made by them. Considering the large number of NBFCs functioning, their geographical distribution and their diversified activities, RBI has been keen to promote the concept of self regulatory organisation among NBFCs, particularly for smaller NBFCs, and discussions with industry are continuing. A Committee constituted by the Bank to suggest formats of balance sheet with adequate disclosures has also submitted its report. The Reserve Bank proposes to introduce these formats and disclosure norms as recommended by the Committee after getting the views of the industry and the Department of Company Affairs of the Government of India.

The registration process for larger NBFCs envisaged under the Act is now more or less complete. Of 10,486 applications of NBFCs which were prima facie eligible, registration has been granted to 7,855 NBFCs, out of which 624 NBFCs have been permitted to accept public deposits. Further, applications of 1,167 companies have been rejected for registration as on August 31, 1999. In addition, as many as 26,904 companies with Net Owned Funds (NOF) below Rs.25 lakh have been given time under the RBI Act upto January 8, 2000 to achieve the minimum level of Rs.25 lakh. All NBFCs in this category should strictly adhere to the above time limit. RBI may not in the normal course, grant extension of time to those NBFCs which have not attained the prescribed minimum NOF of Rs.25 lakh by the stipulated date and accordingly their applications may not be considered for registration.

The following further measures in respect of NBFC sector are being notified with immediate effect :
i. The borrowings from mutual funds presently come within the purview of public deposits as described in the Direction on Acceptance of Public Deposits. It has been decided that borrowings from mutual funds would be excluded from the definition of public deposits.
ii. NBFCs should give public notice of 3 months in leading newspapers before they decide to close a branch or before effecting sale or transfer of ownership.

Deposit Insurance
India is a pioneer in introducing deposit insurance. However, subsequent developments in the financial sector as a whole have resulted in a review of deposit insurance systems in many countries. The approaches include private insurance, differentiated premia, voluntary insurance, separation of insurance from regulatory/supervisory bodies, extending insurance to non-banks, etc. A Working Group was constituted in the RBI to review the role of deposit insurance in India. The Group conducted a detailed survey of the nature of deposit insurance in India with regard to instruments, institutions and regulatory framework, including a review of the international experience in this regard. The Group has recommended changes in the existing system in regard to deposit coverage, institutions to be brought within the ambit of deposit insurance, regulatory systems to be put in place, risk-based premium, the parameters relevant for assessment of risk and ownership and capital of deposit insurance agency. The Report is being released for wider public discussion.

Regulations Review Authority (RRA)
In April 1999, the RBI had set up a Regulations Review Authority (RRA) with a view to reviewing any procedural regulation or requirement of RBI which was not considered necessary or relevant by banks, market participants, foreign investors, NRIs, Indian citizens and experts. Since its inception, RRA has so far received 150 applications covering more than 200 suggestions relating to various operational areas of the Bank. Of this, nearly 50 per cent, covering about 115 suggestions have been disposed of and the remaining are at various stages of processing. Some of the procedural suggestions accepted for implementation are (i) doing away with the requirement of sample test checking of freshly printed MICR cheques, (ii) freedom to banks in fixation of service charges, (iii) displaying of information on NBFCs registered, (iv) changes in the structure of MMMFs, (v) arrangements for greater dissemination of information to public, and (vi) procedure for quicker dissemination on FIIs' investment limits. The RRA has also set up a number of technical groups with membership from both within and outside the Bank, to review and recommend changes in the current practices pertaining to regulation, documentation and reporting.

Year 2000 (Y2K) Preparations
The Reserve Bank has been closely monitoring the Year 2000 (Y2K) readiness in the financial sector so that business continuity is assured. The MICR cheque clearing systems at the Reserve Bank have been replaced by the state of the art Y2K compliant systems. The systems are already in operation in Mumbai, Chennai and Delhi and will soon go on stream in Calcutta and thus become fully operational in the metropolitan cities. All the 103 commercial banks and their 40 subsidiaries have confirmed Y2K readiness as at the end of August, 1999. Besides, all the Issue Offices of the Reserve Bank and currency chests at commercially important cities have been asked to store adequate quantities of cash in order to meet any sudden increase in demand. In line with the international practices, all banks shall remain closed for public transactions on January 1, 2000.

To enable the banking system to tide over the century date change liquidity needs, a contingency plan has been put in place including the following measures :
Special Liquidity Support
With a view to enabling the banks to meet any unanticipated additional demand for liquidity in the context of the century date change, it has been decided to introduce a 'Special Liquidity Support' for the period December 1, 1999 to January 31, 2000. Under the 'Special Liquidity Support', banks will be eligible to avail of liquidity under Section 17(4)(a) of the Reserve Bank of India Act, 1934 to the extent of their excess holdings of dated Government of India Securities/Treasury Bills over the Statutory Liquidity Ratio (SLR) required to be maintained. The rate of interest on this facility will be 2.5 percentage points over the Bank Rate. This facility will be in addition to the collateralised lending facility (CLF and ACLF) and export credit refinance facility provided to all scheduled commercial banks, at present. Banks not holding significantly higher amounts of Government of India securities beyond that indicated by the required SLR are encouraged to have standby arrangement for liquidity support with those banks which are eligible for Special Liquidity Support. Detailed operating guidelines will be issued separately.

Flexibility in the treatment of CRR
Normally, banks maintain minimum cash in their own vaults since it is an idle asset, without the benefit of earning any interest. In the context of date change at the turn of the century, in order to meet any additional demand for bank notes as a contingency, banks may have to keep larger vault cash for meeting their business transactions. At present, such cash in hand with the bank though an eligible asset for SLR, is not counted for CRR requirements. To facilitate banks to tide over the contingency during the millennium change, it has been decided to treat cash in hand maintained by the banks for compliance of CRR for a limited period of two months commencing from December 1,1999 to January 31,2000. It is clarified here that the cash in hand which will be counted for CRR purposes, during the above period cannot be treated as eligible asset for SLR purposes simultaneously.

As already indicated, for operational convenience, the maintenance of CRR by banks is being lagged by two weeks. As such, for maintaining CRR during the fortnight beginning January 1, 2000, the NDTL base would be December 17, 1999. With the leverage of two weeks available, banks should not have any problem in complying with the CRR requirement around the century date change. Nevertheless, any bank that expects a special problem in meeting its CRR obligations at the end of the year can approach the RBI for appropriate relaxation/assistance. Contingency Funding Line

from Head Offices Abroad
Some banks have desired to put in place a contingency funding line from their head offices abroad to meet liquidity problems if any, arising during the century date change. As per the extant stipulations, repayments of borrowings from abroad by banks (i.e., authorised dealers), is allowed only if they have no outstanding borrowings either from the RBI or other bank/financial institution in India and are clear of all money market borrowings for a period of at least four weeks before the repayment. It has been decided to temporarily permit foreign banks to bring in Head Office funds and repatriate such funds during the period of two months from December 1, 1999 to January 31, 2000 without the above restriction.

Reserve Bank of India, Mumbai,
October 29, 1999.

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