Jalan offers no surprises, but reduces money market risks

MUMBAI: Bimal Jalan stepped into the shoes of the quintessential central banker at a time when the dice is not rolling in his favour. He has tried to talk down the lending rate, while actually refraining from the big bang move of a rate cut.

He has promised half-a-point cut in the cash reserve ratio which will release over Rs 5,000 crore into the system with effect from June 15 or even before if the money markets are tight, understandably to coincide it with a pickup in the government’s borrowing programme and a possible credit uptake.

And to keep the sentiments alive he has assured that the benchmark Bank Rate — the rate at which banks borrow from the Reserve Bank of India — will be lowered half a point from 6.5 per cent if inflation is comfortable and the situation warrants.

This is the first time that RBI has announced its intention of lowering BR in future. “I have shown you my cards...there are no surprises. The ground realities are comfortable.. inflation is low, forex reserves are high and markets are stable,� he told the media soon after presenting the Monetary and Credit Policy for 2002-03.

But, Jalan has tried to minimise the risks that lie beneath a placid, liquidity-sloshed money market offering cheap overnight funds. With several banks borrowing from the overnight call market to lend long or invest in rising gilts, RBI has put caps on lending and borrowings by banks in this market — a move that will make life difficult for many banks, but could see the development of a term money market.

While there were no surprises for the bond dealer to lap up, Jalan has put into use the time tested tool of moral suasion to bring down lending rates, and reworking deposit rates which will call for a change in the mindset of the average depositor.

The RBI governor has urged banks to lower their spread over the prime lending rate — the rate to the most credit worthy — “wherever they are unreasonably high so that credit may be available to the borrowers at reasonable rates.�

“But this is not a moral situation, but a something position. Although interest rates on an average has come down, the spreads have increased for many banks. We are urging the banks to publish this information,� said the guv.

On the deposit front, he has asked banks to encourage depositors to convert their existing long-term fixed rate past deposits into variable rate deposits.

While in a falling rate regime this could lower the fund cost of a bank, it’s another story whether the average depositor used to fixed contractual rates will go for such schemes.

Like the lending rates, banks will have to also disclose deposit rates across various maturities and effective annualised yield to the depositors who can then compare the rates for different banks in the RBI website. These are new disclosure standards which have never been tried before.

Jalan is candid that the sluggish credit figures essentially reflect a demand side story. With large project loans and infrastructure funding yet to show signs of pick-up, the monetary authority has laid down new rules of the game to ensure that credit flows in other pockets.

Limits for financing different priority sector projects have been raised and banks have been told to exclude funds on-lend to regional rural banks for fulfilling the priority sector target of 40 per cent of advances.

Assuring liquidity, imparting greater interest rate flexibility in the medium term and sustaining a soft bias constitute the basic stance of the monetary policy.

Given this backdrop, the RBI on the back of a $55 bn forex reserves has allowed banks to deploy as much as 25 per cent of its tier I capital in overseas market, tinkered with rates and rules to make export credit and housing loans cheaper, tightened prudential standards to enable banks move over to the 90-day provisioning norm and told banks to provide capital against market risk in line with the international norms.

Over and above, the credit policy sends out the clear message that a banker’s life will be far more competitive and accountable.