CHENNAI, July 28: The chairman of the banking sector reforms committee, M Narasimham, has said that any move to curtail inflation (which has crossed eight per cent) by tightening the money supply is not the real solution to the problem. Such a kneejerk reaction from the Reserve Bank of India (RBI) at a time when the industry is not doing well would kill the incipient recovery of which the economy is showings signs.He was replying to a question at the seminar on banking sector reforms organised by the Confederation of the Indian Industry (CII) on Tuesday. Ushering in greater fiscal discipline would be the real answer to the problem, Narasimham said.Tracing the causes for the inflation, he said it was a combined lag effect of the easing of the money supply and dip in the agriculture output. Three years ago RBI tightened screws on lending to the commercial sector as the government borrowing shot up. This resulted in the economy slowing down and when the next government eased the money supply it coincidedwith the fall in the agricultural output by three to five per cent.Earlier, delivering the keynote address he said that there should be "no conflict between social banking and sound banking" in priority sector lending. Though the first report on banking reforms suggested a relook at the concept of priority sector lending with the intention of ultimately doing away with it, the reality in the form of political compulsion prompted the committee in its second report to adopt a different approach, he added.The approach is lending to that sector on commercial principles rather than to meet targets. Statistics released by RBI, he added, showed that though priority sector advances formed 40% of lendings, the sector's share of NPAs was 47%. It would have been much higher if the loan waivers in respect of some agricultural advances were taken into account.SLR, he said, should not be imposed by the states. Instead, discretionary powers should be given to banks. SLR as a measure of providing funds to thegovernment should end, he added.He also came down heavily on the legal system which has tardy, tortuous and archaic laws. Enforcement of contract is not easy and there is also a bias against the creditor in favour of the debtor, Narasimham said. A legal system which would provide unbiased and expeditious settlement of claims alone would help the banking system reduce its gross NPAs.
