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April 19, 2001
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RBI bars co-op banks from lending against security of stocks

Click here for bigger picture: RBI Governor Bimal Jalan. Photo: Jewella MirandaThe Reserve Bank of India came down heavily on the urban co-operative banks with stringent prudential norms, debarring them from lending funds to individuals or entities against security of stock.

In its half yearly Credit and Monetary Policy announced in Bombay on Thursday, the RBI took several other measures in strengthening and widening the participation of banks and primary dealers in the overnight call money markets, government security markets, besides making changes in liquidity adjustment facility.

Citing the recent 'irresponsible and unethical' behaviour on the part of some cooperative banks, the RBI suggested immediate interim measures to ward off such contingencies with serious adverse consequences without continuing to wait for legal and institutional reform.

Besides stopping these banks from lending against shares, the RBI advised the banks to unwind their existing lending to stockbrokers or direct investment in shares.

It also discouraged their long-term dependence on borrowing from overnight call money market and also from other cooperative banks.

RBI mulls regulator for co-op banks

In this context, the RBI suggested setting up a new apex supervisory body to undertake inspection and supervisory functions in relation to scheduled and non-scheduled urban cooperative banks.

The apex body can be under the control of a separate high-level supervisory board consisting of representatives of the Union government, state governments and the RBI.

Exposure norms revised

Besides extending the amended guidelines for non-performing assets up to June 30, 2001, the RBI revised various exposure norms and operational framework for banks and corporate bodies.

It advised banks to incorporate a condition in the loan agreement for obtaining consent of the borrowers to disclose their names in the event of their becoming defaulters.

Banks, which have not yet put in place the system of obtaining such consent, should complete the process by September 3, 2001.

Daily requirement of CRR relaxed

The RBI also rationalised the interest rates on export credit, relaxed the daily requirement of maintaining cash reserve ratio, and enhance the prudential norms for the financial institutions and non-bank finance companies.

Later, addressing top executives of commecrical banks, RBI Governor Bimal Jalan said that the policy statement was focussed to improve the functioning of the various segments of financial markets.

The main objective of these measures were to increase operational effectiveness of monetary policy, redefine the regulatory role of the RBI, strengdten the prudential and supervisory norms, imporve the credit delivery system and develop the technological and instatutional infrastructure of the financial sector.

CRR, Bank Rate unchanged

Jalan did not want to make any changes in CRR or the Bank Rate at this moment. These measures will be announced as and when considered necessary in the light of the overall monetary developments, he observed.

Expressing concern over increasing level and complexity of frauds and difficulties being faced by the banks to recover the financial losses, the RBI informed that it has constituted a committee on legal aspects of bank frauds to define financial frauds, lay down procedural laws, examine the process of investigation of frauds and prosecution of persons involved.

In the process of rationalising the interest rates on export credit, the RBI proposed to make interest rate on export credit extended by banks to be indicated as a ceiling rate in respect of all categories so that interest rate charged by the banks can actually be lower than the prescribed rate.

Accordingly, in respect of pre-shipment credit up to 180 days, the ceiling rate applicable will be 1.5 percentage points below the prime lending rate and banks would be free to charge interest rate below the ceiling rate prescribed at 1.5 percentage points below PLR.

Ceiling on foreign currency loans revised

The RBI also decided to revise the ceiling rate on foreign currency loans for exports by banks to LIBOR plus 1.0 percentage point, which will make this rate more competitive.

Reviewing the LAF, the central bank said that there was a need for a gradual switchover to the subsequent state of LAF like splitting the standing liquidity facilities available from the RBI into two parts -- normal facility and back-stop facility.

Of the total limits of liquidity support available to primary dealers and banks, the normal facility would initially constitute about two-thirds and the back-stop facility about one-third.

It also changes in the operating procedures of LAF by reducing the minimum bid size for LAF from Rs 100 million to Rs 50 million.

The medium-term objective is to move over gradually to liquidity adjustment through LAF combined with back-stop facility at variable rates and do away with various specific standing liquidity facilities now available at the Bank Rate.

Move to deregulate financial markets

In a move towards further deregulation of financial markets, the RBI said that it would reduce the minimum maturity period for term deposits to 7 days from the present 15 days at the discretion of individual banks so that it would provide opportunities for non-banks to invest short-term surplus funds in a more flexible manner as they would be phased out from call money market participation.

But this facility would be available only in respect of wholesale deposits of Rs 1.5 million and above where banks have the freedom to offer differential rates according to size of deposits.

However, the stipulation of minimum maturity of 15 days for certificate of deposits and commercial paper will continue.

Further, the RBI also decided to reduce the maintenance of daily minimum requirement of crr of 65 to 50 per cent for the first seven days of the reporting fortnight while continuing with the minimum requirement of 65 per cent for the rest of the fortnight.

It also decided to enhance the interest paid on CRR by the central bank from the current level of 4 per cent to 6 per cent from the fortnight beginning from April 21, 2001.

It also exempted the inter-bank liabilities of maturity of 15 days and above from the prescription of minimum CRR requirement of 3 per cent.

According to banking sources, all these measures would provide an additional liquidity of Rs 190 billion to the banking system in the country.

With all these measures backed by the technological infrastructure, RBI officials felt that they would be able to operate and implement the monetary policy with greater flexibility.

Further, the proposed separation of debt management would greatly facilitate the independence of the RBI in performing its monetary management function.


SLR = statutory liquidity ratio. Banks in India are required to maintain 25 per cent of their demand and time liabilities in government securities and certain approved securities. These are collectively known as SLR securities. The buying and selling of these securities was the seed of the 1992 scam.

CRR = cash reserve ratio, the fortnightly cash balances maintained by commercial banks with the central bank.

FCNR(B) deposits. (foreign currency non resident Indian - banking deposits.)

FCNR (foreign currency non resident Indian).

M1: A measure of money supply that includes all coins and notes in circulation, and personal current accounts. M3: A measure of money supply, including those covered by M2 -- a measure of money, supply, including M1, plus personal deposit accounts -- plus government deposits and deposits in currencies other than rupee.

Repo: repurchase agreements or ready forward deals, a secured short-term -- usually 15-day -- loan by one bank to another against government securities. Legally, the borrower sells the securities to the lending bank for cash, with the stipulation that at the end of the borrowing term it will buy back the securities at a slightly higher price, the difference in price representing the interest.

Monetary & Credit Policy 2001-2002 (First Half)
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