Good in patches but more issues need to be addressed

The primary goal of a credit policy, apart from keeping a check on inflation and exchange rate management, is to facilitate liquidity in order to induce economic growth and bring structural reforms to deepen and strengthen the financial markets financing such growth — both long-term and short-term requirements. My assessment of credit policy is based on these parameters.

On a macro basis, a glaring omission in the credit policy, like in the earlier policies, is the continued lack of focus on the funding requirements of the infrastructure sector — both by way of long-term funding as well as acquisition financing. As infrastructure projects, mergers & acquisitions, and government disinvestments gain significance, particularly for a developing economy like ours, this needs to be corrected.

Good Points of the Policy:

*Regulation to tighten access to call money markets
*A clear indication of continued policy of softer interest rates as the real interest rates are still too high;
*Reduction in CRR by 50 bps;
*More prudential measures to bring financial stability; and
*Provision for crystallisation of ECBs into Rupee loans in appropriate cases

The issues that got left out and which, in my view, should be addressed by the credit policy are:

Infrastructure Financing: Bringing infrastructure companies under the umbrella of priority sector lending would provide cheaper and broad-based credit to the infrastructure sector. At the very minimum, infrastructure loans should be exempt from priority sector lending norms.

Acquisition Financing: In the present phase of corporate consolidation, particularly in sectors such as telecom and also in the backdrop of government’s disinvestment program, there is a strong case for relaxation of the guidelines related to acquisition financing by banks and also financing against collateral of shares.

Broader repo market: Including dematerialised top-rated corporate debt instruments as repo-able instruments will significantly improve the much-needed liquidity in secondary market of corporate debt, thereby reducing the credit spread between sovereign and corporate debt instruments and also deepening the debt market.

Tiered risk weighting structure: If banks are allowed to adopt a tiered risk weighting structure favouring AAA issuers and infrastructure companies in addition to PSUs, the corporate debt market would benefit in terms of both liquidity and tighter spreads.

External Commercial Borrowings (ECBs): In view of the comfortable foreign exchange reserves, the need to tap international markets for infrastructure build-out and the availability of long-term forward covers, the policy must address the need to attract more external borrowings. Accordingly, historical deterrents like restrictions on a minimum tenure and withholding tax on ECBs need to be withdrawn.

Market Related: The Reserve Bank of India must introduce a policy making it mandatory for intermediaries to act as ‘market makers’ in respect of private debt issues. This would provide much needed depth and liquidity to the debt markets.

Single borrower limits: There is a case for greater flexibility in
the computation of single borrower limits and group limits, especially with regard to infrastructure companies.

Single regulatory authority: This should be appointed to oversee the corporate debt market. This move in itself would help initiate more reforms, unlike the current situation where RBI’s reforms with respect to the regulations for financial institutions have only a secondary effect influencing the corporate debt markets

Overall I feel the policy is in the right direction, but should address the above issues to be more meaningful and effective.

The author is Director (Finance), Bharti Group