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Banking
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policy environment> financial reforms
Financial Reforms 1999-2000
The Reserve Bank continued to play a major role in the development of financial markets and improvement of credit delivery systems. In order to provide greater flexibility, the Reserve Bank has attempted to move gradually towards provision of a daily liquidity adjustment facility in the Indian money markets. The Interim Liquidity Adjustment Facility (ILAF) introduced in April 1999 was replaced in June 2000 by a full fledged liquidity adjustment facility in which liquidity would be injected through reverse repo auctions and liquidity would be sucked out through repo auctions. This is being introduced in stages.
The Reserve Bank undertook several measures to further facilitate the deregulation and flexibility in interest rates. First, the Reserve Bank allowed banks the freedom to prescribe different prime lending rates (PLRs) for different maturities. Banks were accorded the freedom to charge interest rates without reference to the PLR in case of certain specified loans. Banks may also offer fixed rate term-loans in conformity with the ALM guidelines. Secondly, scheduled commercial banks (excluding regional rural banks), PDs and all-India financial institutions were allowed to undertake forward rate agreements (FRAs)/interest rate swaps (IRS) for hedging and market making. Corporates and mutual funds were allowed to undertake these transactions for hedging balance sheet exposures. The Reserve Bank would also consider requests for hedging commodity price exposures from Indian corporates in specified products, such as over-the-counter (OTC) futures contracts, based on average prices, categories of options contracts, etc. Thirdly, the Reserve Bank allowed the interest rates that are implied in the foreign forward exchange market to be used as an additional benchmark to price rupee interest rate derivatives and facilitate integration between money and foreign exchange markets.
A Working Group was constituted by the Reserve Bank to explore the possibilities of setting up a Credit Information Bureau in India (Chairman: Shri N.H.Siddiqui). Based on its recommendations and realising the need for development of better institutional mechanisms for sharing of credit related information, the Union Budget 2000-01 announced the establishment of a Credit Information Bureau. The Reserve Bank advised banks and FIs in April 2000 to make necessary in-house arrangements for transmittal of the appropriate information to the Bureau.
With the passing of the Insurance Regulatory and Development Authority (IRDA) Act, 1999, banks and non-banking financial companies (NBFCs) have been permitted to enter the insurance business. The Reserve Bank issued guidelines in this regard. These are felt necessary in view of the fact that the insurance business does not break-even during the initial years of operation and that the banks and NBFCs do not have adequate actuarial and technical expertise in undertaking insurance business.
The Reserve Bank issued guidelines to banks for operation of gold deposit schemes. The Reserve Bank also granted in-principle approval for an assaying and hallmarking venture to be set up by the State Bank of India (SBI) as its subsidiary, with equity participation from Allahabad Bank, Corporation Bank, Canara Bank and Credit Suisse Financial Products, London.
In view of the need for promoting and sustaining financial stability and in the light of the international discussions on transparency practices and standards in different financial sector activities, the Reserve Bank appointed a Standing Committee on International Financial Standards and Codes (Chairman: Dr. Y.V. Reddy) in order to identify and monitor developments in global standards and codes being evolved and consider the applicability of these standards and codes to the Indian financial system and chalk out a road map for aligning India's standards and practices with international best practices. The Reserve Bank has already initiated several measures in order to achieve greater transparency in banking operations by closely complying with the Core Principles for effective banking supervision prescribed by the Basel Committee on Banking Supervision. The Reserve Bank issued a self-assessment of the Core Principles in operation in Indian banking.
Financial reforms can be reviewed under three major heads:
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