Chambers demand interest cut

The chamber stated that the present requirement of CRR at 10 per cent was much higher than the internationally prevalent ratio of three per cent.

Therefore, the medium-term objective should be to reduce the CRR to international levels, which would improve the profitability of the banks while releasing funds for the commercial sector. “At the present juncture, a reduction in CRR by one per cent in two phases should be considered.”

The CII had earlier this week called for a one per cent cut in bank rate and a 2.5 per centdrop in cash reserve ratio (CRR). The government should move towards a three per cent CRR in the long-run as recommended by the Tarapore committee, it had said.

The chamber also called for an increase in the capital adequacy ratio from eight per cent to 12 per cent in four years, at the rate of one per cent a year, and in the credit-deposit ratio from 50 per cent to 55 per cent.

Regarding SLR, FICCI was of the opinion that there is a scope for reducing two and a half per cent so as to peg it at 22.5 per cent. The present SLR requirement of 25 per cent is high by global standards. Although the SLR securities now bear market-related interest rates and do not strain the banks profitability, they do represent a pre-emption of funds by the public sector. Phasing out of SLR requirements would require a change in Section 24 in the Banking Regulation Act of 1949.

On reduction in the bank rate, it said that the recent reduction in the bank rate from 10 per cent to nine per cent was a welcome step. But it stillremains much higher than the rates prevailing in the international market.

In this regard, it suggested that a further reduction by one per cent is required to improve the profitability of the various productive sectors.

The other suggestion of FICCI is that the group approach to lending should be abolished. The present policy of group approach to lending adopted by banks and financial institutions is self-defeating and should be done away with. All corporate entities have a limited liability and all shareholders have equal responsibility. If a company fails, it is a part of normal business risk and should be accepted as such. This approach to lending which is a hangover of the licence/quota system adversely affecting the professionalisation of management.

The chamber has also suggested that the credit facility should be extended to distribution/trade sector. Presently, no institutional finance is available for distribution/ trade sectors for financing its fixed assets needs like acquiring ofpremises/ godowns and payment of dealership deposits.

Establishment of short-term benchmark rate is the other suggestion of FICCI.