Towards A Swifter Tempo

ACCORDING to RBI governor Chakravarthy Rangarajan, the three-pronged objective of the busy season credit policy announced by the Reserve Bank of India on October 21 is to continue money supply growth, accelerate flow of credit and carry forward financial sector reforms. Whether he meets that objective is crucial—the economy's health may hinge on it.

Sluggish industrial growth and low credit off take in the first few months of 1997-98 have already led the RBI to lower its GDP growth estimate from 7 per cent to about six. Now Rangarajan has cut the banks' mandatory cash reserve ratio by two percentage points to release an additional Rs 9,600 crore into the banking system. Indian banks can now easily earn a differential interest of Rs 480 crore in the six months left of the current fiscal year. The extra disbursable funds with banks, Rangarajan believes, will now force banks to lend. A persistent charge from industry has been about the reluctance of banks to lend to any but the safest of projects.

Simultaneously, to bring lending rates to industry down, he cut the Bank Rate—the reference base interest rate—by one percentage point. The next day, the State Bank of India, the Bank of Baroda and Bank of India cut prime lending rates from 13.5 per cent to 13. Others followed suit.

Rangarajan has tried to tackle the problems currently facing the Indian economy at a number of levels. By raising the limit of loans for housing as well as road and water transport projects that can be treated as priority sector lending, the credit policy aims to spur lending to projects where investment can have a significant multiplier effect far beyond the sectors themselves. The lowering of the pre-shipment export credit rate by 1 per cent will help exporters access cheaper funds and improve their competitiveness in the global markets. The permission granted to banks to provide bridge finance against equity issues will give corporates greater flexibility in planning their equity issues. Adds Nimesh Kampani, chairman, J.M. Financial: "It will also give a much-needed fillip to the primary markets." The RBI has also allowed SEBI-approved Indian funds to invest in the overseas market within an overall cap of US $500 million (about Rs 1,700 crore).

Will it work? Says Rangarajan: "We expect 30 per cent increase in overall credit offtake from the first half and 20 per cent increase over the previous year." The banking system is also expecting an increase in deposit from Rs 28,000 crore last year to Rs 38,000 crore. Some observers remain sceptical. Says Vivek Moorthy, professor, IIM, Bangalore: "The policy continues the monetary easing without adequate attempts to tackle the problems of lending and the banking sector."

 One of these problems is the government's tendency to corner credit offtake to—fundamentally—finance its inefficiencies, crowding out worthier candidates for credit. Rangarajan, though, says that the bulk of government borrowings for the year has already taken place in the first six months and will not be a factor now. Besides, industry's credit offtake traditionally rises in the second half of the financial year.

Clearly, the latest credit and monetary policy puts the onus on the banks to improve the credit offtake in the country and help revive the economy. The other side of the coin is that the RBI governor has already warned: "With progressive liberalisation of the financial markets, comprehensive risk management is essential. The need to monitor the maturity and liquidity mismatches, interest rate risks and maintain them at acceptable levels cannot be overemphasised. So, banks should put in place adequate asset liability management systems."

 Says Dharam Vakharia of Fiduciary Capital Services: "The policy has now brought borrowers and lenders to the marketplace. The market forces will now decide the future course of action." For the time being, however, all eyes are on November 9 when bankers meet RBI officials to decide the financial economy of the country.