RBI cuts CRR, releases Rs 8,060 cr to boost liquidity

Continuing the reform measures in the banking system, RBI Governor Dr Bimal Jalan alsoannounced withdrawal of 30 per cent surcharge on import finance, withdrawal of minimum 20 per cent interest on overdue export bills and hiked the minimum maturity of FCNR (B) deposits to one year. CRR has been reduced from 10 to 9 per cent in two installments, effective from the fortnight beginning November 6 and fortnight beginning November 20. However, it retained the Bank Rate — the interest rate at which the RBI gives funds to the banks — at 8 per cent.

However, bankers were against any immediate reduction in prime lending rates (PLR). “I do not see any need immediately to change interest rates. After all our funding costs have still not come down,” said R S Hugar, Chairman and Managing Director of Corporation Bank, adding, “the buzzword currently is profitability. So without costs coming down the scope for a cut in lending rates is less.”

Jalan announced several measures for exporters, infrastructure financing, money market, government securities market and made changes in prudential norms, PLRnorms and credit delivery. The interest rate surcharge of 30 per cent on import finance has been withdrawn with immediate effect. “This will reduce the financing cost of import for the industry,” Jalan told a news conference here on Friday.

In a bid to boost exports, the minimum rate of 20 per cent interest on overdue export bills has also been withdrawn and banks will have the freedom to decide the appropriate interest rate on overdue export bill. In line with the policy of minimising the short-term external borrowing liabilities, the minimum maturity for FCNR (B) deposits has been raised to one year from the current six months. Banks, however, will continue to have the freedom to offer floating rate deposit with a maturity of one year or more and interest reset period of six months.

“These measures will not only maintain reasonable liquidity and stable interest rate, but also help tide over any unanticipated additional demand for liquidity in the context of the century date change,” Jalan said.Keeping the Y2K problem in mind, the RBI has decided to introduce a special liquidity support scheme for banks during the period from December 1, 1999 to January 31, 2000 and close all banks on January 1, 1999.

Similarly, the bank’s exposure to an individual borrower has been brought down from 25 per cent of the bank’s capital fund to 20 per cent, effective from April 1, 2000. The RBI also enlarged the scope of bank financing for infrastructure project by allowing the banks to exceed the group exposure norms of 50 per cent to the extent of ten per cent provided the additional exposure is for the purpose of financing infrastructure project.

Jalan also warned the government on the fiscal outlook for the rest of the year and stressed the need for determined action to increase the revenues, reduce the deficit in the public sector and cut expenditure through appropriate policy actions. Urging for necessary actions to correct fiscal distortions, he said fiscal slippages were no longer a domestic concern asinternational agencies and global investors kept a close watch on emerging trends in government finances.

The central bank said the growth in gross domestic product (GDP) in the current year was likely to be 6 to 6.5 per cent provided the recovery in industrial production would gather momentum and there was no unexpected setback on the agricultural front. The inflation rate for the current year was likely to be less than 4.8 per cent in the previous year.

Jalan listed high non-interest operating expenses, high overhang of non-performing assets, interest tax, reluctance of both banks and depositors to prefer variable interest rates, substantially higher interest rates on contractual savings like provident fund and National Savings Scheme (NSS) and persistent and large government borrowings, as being responsible for higher lending rates.

He said there was persistent and large volume of market borrowing by the government giving an upward bias to the entire interest rate structure. In view of the decline ininflation rate and favourable economic outlook, the governor said that there was a case for a further downward movement in the structure of interest rate. The RBI has already indicated its policy preference for softening of interest rate to the extent circumstances permit.