Change in credit policy

Print edition : May 09, 1998

THE Reserve Bank of India announced the credit policy for the lean season on April 29, and its thrust was on arresting the decline in industrial output. Under this, the bank rate was reduced by one percentage point, from 10 to 9. It also reduced the repo rate from 7 to 6 per cent, freed interest rates on small loans, and promised to cut the cash reserve ratio (CRR) if the situation warranted it.

The new policy eased export credit by reducing the interest on pre-shipment credit to 11 per cent. It also restored export credit refinance to 100 per cent of the increase in outstanding export credit and simplified the delivery mechanism for agricultural credit.

The minimum maturity period for term deposits has been reduced from 30 to 15 days. The policy allows banks to offer rates based on the size of deposits and stipulated that interest rates on loans below Rs.2 lakhs should not exceed the prime lending rate (PLR). Advances against short-term deposits can be at the PLR or at lower rates. The two-tier subsidi-sed interest rate structure on priority sector advances has been scrapped.

The RBI Governor said that he planned to strengthen the prudential norms of governing banks with a view to raising them to international banking standards.

Industry, however, is not happy with the measures. The Confedera-tion of Indian Industry said that the credit policy had failed to take 'bold measures' to arrest the slowdown and restore the health of the economy. According to the CII, the policy will make it difficult to achieve the projected growth rate of between 6.5 and 7 per cent. It wants increased bank participation in primary equity markets, an issue on which the policy is silent. It has also complained that the RBI has announced no new instruments that will deepen and widen the money market.

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