Monetary and Credit Policy for 2001-2002

Dr. Bimal Jalan, Governor, RBI while presenting the annual Monetary and Credit Policy for 2001-02 on April 19, 2001 pointed out that this year's policy is being presented at a time when serious lacunae have emerged in the functioning of certain segments of the financial system. He mentioned that necessary remedial measures urgently need to be taken to remove the weaknesses that have been noticed so that India's financial sector continues to remain strong and safe. The overall stance of monetary policy as per his announcement will be - (i) Provision of adequate liquidity to meet credit growth and support revival of investment demand while continuing a vigil on movements in the price level and (ii) continue the present stable interest rate environment with a preference for softer rates.  

Monetary Policy 

  • GDP growth rate projected at 6 - 6.5 percent. 
  • Non-fund credit growth target at 16.17 percent (it was 14.3 percent last year). 
  • Expansion in broad money at 14.5% (16.2 percent last year).
To strengthen the financial system and to improve the functioning of the various segments of financial markets RBI governor outlined the following decisions :- 
  • Proposal to split the standing liquidity facilities available from RBI into two parts, viz., (i) normal facility and (ii) Back-stop facility. 
  • The normal facility will be provided at the Bank Rate.  
  • The back-stop facility will be provided at a variable rate linked to reverse repo rate/repo rate/NSE-MIBOR.  
  • Of the total limits of liquidity support available to PDs and banks, the normal facility would initially constitute about two-thirds and the back-stop facility about one-third.

Export Credit Refinance

W.e.f. fortnight beginning May 5, 2001 scheduled commercial banks would be provided export credit refinance to the extent of 15.0 percent of the outstanding export credit eligible for refinance.  

Export Refinance Rationalised

Based on the current PLR upto 180 days of major public sector banks, there is likely to be a reduction in interest rate by 1.0 - 1.5 percentage points. Banks allowed to give loan at PLR minus 1.5 percent rate for export finance.  

Interest Rate Policy

  • Banks can lend below PLR to exporters and other public enterprises.  
  • Banks allowed to pay higher deposit rates to senior citizens.  
  • Minimum tenure of term deposits reduced to 7 days.  
  • Ceiling on FCNR(B) rates lowered to libor in line with global fall in rates.  
  • Banks to get higher interest rate on CRR.  
  • Prudential norms for banks, FIs being tightened:-
    • a) Credit exposure to single borrower reduced from 20% to 15% of capital funds; group exposure cut to 40%; 
    • b) The assets of FI would be treated as non-performing if interest and/or principal remain overdue for 180 days instead of the present 365 days with effect from the year ending March 31, 2002.  

Urban Co-operative Banks (UCBs)

(i) Prudential Measures 

In order to strengthen prudential measures for urban co-operative banks, in the intererst of their members and depositors, the following measures are proposed : 

  • With immediate effect, Urban Co-operative Banks (UCBs) are being advised not to entertain any fresh proposals for lending directly or indirectly against security of shares either to individuals or any other entity. They are also advised to unwind existing lending to stock-brokers or direct investment in shares, at the earliest. 
  • UCBs advised not to increase their term deposits with other UCBs.  
  • With effect from April 1, 2003, the scheduled UCBs will need to maintain their entire SLR assets of 25.0 per cent of NDTL only in government and other approved securities. 
(ii) New Supervisory body for co-operatives proposed  

Credit Delivery Mechanism

Relief Measures for Gujarat : 

As relief towards Gujarat, a large number of measures have been taken. These inter-alia include : 

  • Interest rate on loans at PLR of the SBI.  
  • Relief/concessions for affected exporters by extending the period of packing credit, conversion of dues into short-term loans repayable in suitable instalments and relaxation in NPA classification norms. 
  • In respect of agricultural loans, banks are not to recover principal or intererst for a period of two years with a provision for reschedulement upto 7 years. 

Bank Rate 

RBI vide its circular dated March 01, 2001 has reduced the bank rate by one half of 1 percentage point from 7.5% per annum to 7.0% per annum effective close of business on March 01, 2001. The bank rate was reduced from 8% to 7.5% on February 16, 2001.  

CDR mechanism to help reduce bank NPAs

The corporate debt restructuring (CDR) mechanism, which is to come into effect with the 
repeal of SICA (Sick Industrial Companies Act) and the consequent abolition of the Board for Industrial and Financial Restructuring (BIFR), will help banks to scale down their non performing assets (NPA) by treating rescheduled accounts as standard debt instead of making provisions in their balance sheet, as is the practice at present according to the draft prepared by Finance Ministry. Presently any restructuring of corporate debt, even through rescheduling of principal dues and reduction of interest renders the entire debt as NPA and requires provisioning. Only if debtors adhere to the payment schedule for two years after restructuring of account the amount is treated as standard. 

Provisioning or write-off can be done to the extent of waiver involved and the balance of the restructured amount will be treated as standard data. Brief data on such restructured debts will, however, be disclosed in the annual report. 

As part of the CDR strategy, it is proposed that all restructrued debt will have to be disclosed as a separate category under contingent liabilities in the balance sheet. 

Credit Linked Capital Subsidy Scheme for Technology Upgradation of the SSIs 

The Government of India, Ministry of SSI & ARI, Development Commissioner (SSI) have launched Credit Linked Capital Subsidy Scheme for Technology Upgradation of the SSIs. Under the scheme, capital subsidy would be admissible on the loans advanced to the SSIs by SIDBI, eligible Scheduled Commercial Bank and National Small Industries Corporation for technology upgradation in certain select products / sub-sectors. SIDBI has been designated as the Nodal Agency for channelising assistance under the scheme. The scheme will be in operation for a period of five years from October 01, 2000 to September 30, 2005 or till the time sanctions of capital subsidy by the Nodal Agency reach Rs.600 crore, whichever is earlier. 

SIDBI can also consider from time to time inclusion of other institutions, subject to the approval of the Governing and Technology Approval Board (GTAB) constituted by the Government of India. 

Initially the Scheme would cover the following products / sub-sectors in the SSI sectors :- 

  • Leather and Leather products including footwear and garments; 
  • Food Processing; 
  • Information Technology (Hardware); 
  • Drugs and Pharmaceuticals; 
  • Auto parts and components; 
  • Electronic Industry particularly relating to design and measuring; 
  • Glass and Ceramic items including tiles; 
  • Dyes and intermediates; 
  • Toys; 
  • Tyres; 
  • Hand tools; 
  • Bicycle parts; 
  • Foundries Ferrous and Cast Iron and 
  • Stone Industry. 

New disclosure norms for FIs 

The RBI has notified the new norms for FIs to bring in uniformity in their information disclosure norms and improve transparency in their transactions from fiscal 2000-01. 

These guidelines are minimum standards for incorporating information about NPAs, risks weightages and FIs wishing to make additional disclosures are well advised to do so. Under the new norms, FIs would have to disclose credit exposure as percentage to capital funds and as percentage to total assets, in respect of the largest single borrower, the largest borrower group, the 10 largest single borrowers and the 10 largest borrower groups. However, the names of the borrowers / borrower groups need not be disclosed. 

FIs would also have to disclose credit exposure to the five largest industrial sectors (if applicable) as percentage to total loan assets. 

Under the asset quality and credit concentration, FIs would be required to divulge the percentage of net NPAs to net loans and advances as also the amount and percent of net NPAs under the asset classification categories. 

Information on amount of provisions made during the year towards standard assets, NPAs, investments (other than those in the nature of an advance) and I-T are also required to be shown, the RBI said. 

FIs would have to disclose information about capital including the amount of subordinated debts raised and Tier-II capital. The risks weighed assets would have to be disclosed both for, on and off-balance sheet items. They would also be required to give details of shareholding pattern as on the date of balance sheet. 

On liquidity, FIs would have to present information on maturity pattern of rupee assets and liabilities and maturity pattern of foreign currency assets and liabilities in a specified format, the apex bank said. 

The operating results would need to provide information on interest income, non-interest income and operating profits, all as a percentage to average working funds.  

RBI to formulate asset-liability mgmt norms for coop banks

The RBI is planning to put in place the asset-liability management (ALM) norms for the cooperative banking sector. It is found that many cooperative banks borrow short-term funds but lend for longer tenure which leads to asset-liability mismatch. 

Typically, cooperative banks have average deposit tenure of 1 to 3 years, while their lending tenure varies from one to 15 years. An ALM norm will equip the bank to guard against any interest rate or liquidity shocks. Moreover, it will also improve their funds management. A Committee to suggest ALM norms for cooperative banks is to be soon announced by RBI.  

Revision in interest rates under IDBI Refinance Scheme

IDBI vide its circular dated 22.03.2001 has reduced the interest rate for the medium (non-SSI) sector from 13% p.a. to 12.5% p.a. w.e.f. 20.03.2001. The SFCs/SIDCs are allowed to charge any rate, as hitherto, depending upon their perception of risk involved in each project. 

The revised rate under the scheme will be applicable to : 

  • All cases of loans sanctioned after 20.03.2001. 
  • All cases where relative loan agreement has been executed on or after March 20, 2001 even if the loan / refinance was sanctioned prior to March 20, 2001. 
  • All cases where relative loan agreement was executed before March 20, 2001 but no disbursement has been made. All partly disbursed cases to be refinanced at the existing rate.

SIDBI raises mop-up target 

Small Industries Development Bank of India (SIDBI) has revised its fund generation target. As per the revised plan, it was decided to mop up Rs. 1,500 crore in 2001-02, instead of Rs. 1,000 crore. SIDBI has structured three instruments to raise the funds. About three-fourths of the funds are likely to be raised through private placement of priority and non-priority sector bonds to banks. The balance will be raised through issuing bonds to public. Going by the current year's trend, SIDBI is hoping to raise at least Rs.600 crore through priority sector bonds.  
SIDBI to assist small rural entrepreneurs 
SIDBI has come out with a plan to assist the small entrepreneurs face the challenges of globalisation. SIDBI would give loan to small rural entrepreneurs - both for setting up new ` viable '' units and to release additional and cheaper capital for the existing units to modernise their production system and meet the enhanced power tariffs and other overheads. 

The person to be given loan will be decided by SIDBI with the assistance of NGOs and the state level refinancing schemes. The operational rejuvenation would be put on a pilot trial in select areas in Haryana and Delhi according to head of the Rural Development and Self Employment Training (RUDSET) Institute and FICCI awardee Shri G.K. Bhatnagar "to train resource personnel who are considered potential small ent repreneurs or have the capacity to tap such youth in the villages and small towns. It would cover the dislocated factories of the Capital who have opted for Haryana as their new destination". 

The RUDSET is a Gurgaon based NGO, jointly funded by the Syndicate bank and Canara Bank and has so far been giving 15 days free training to rural artisans.  

Revision of Interest Rate Structure under Refinance / Line of Credit (LOC) Scheme 

SIDBI vide its circular dated 02.03.2001 has revised the rates of interest on refinance against term loans sanctioned to the units in small scale sector as well as non-SSI sector.  

Revised Interest Rate Structure under Refinance / Line of Credit (LOC) scheme of SIDBI effective March 7, 2001
A. Refinance against term loans in respect of projects / activities eligible for assistance under the Scheme. Interest on term loans for fixed assets and working capital advances (%pa)  Interest on refinance  
[ % p.a.]
(i) Up to Rs. 50,000/-  With a maximum spread of  

over and above applicable refinance rate 

As may be decided by the PLI

(ii) Above Rs. 50,000/- and upto Rs. 2 Lakhs 10.25
(iii) Above Rs. 2 lakh 11.50
B. Refiance against term loans in respect of projects / activities eligible for assistance under TDMF and ISO 9000 schemes Interest on term loans  
Interest on refinance  
[ % p.a.]
(i) Up to Rs 50,000/- Not exceeding 12.50% 9.25
(ii) Above Rs 50,000/- and upto Rs 2 Lakhs 10.25
(iii)Above Rs 2 lakh 10.50
C. Refinance against term loans in respect of projects/activities of non-SSI of SFCs/SIDCs eligible for assistance As may be decided by the PLI 12.50
        * 2% lower than Long Term Prime Lending Rate of SIDBI 

The revised rates of interest on refinance against term loans will be applicable to all cases where refinance on term loans are sanctioned/disbursed by SIDBI on or after March 07, 2001 and to all disbursements made under LOC by SIDBI on or after 7.3.2001. However, cases where refinance on term loans have been partly disbursed before March 07, 2001, will continue to carry the pre-revised applicable rates of interest. 

The PLIs are allowed to fix the rate of interest on loans upto Rs.2 lakh with a maximum spread of 3% and for loans above Rs.2 lakh, depending upon the risk perception in each proposal. 

NHB reduces refinance rate by 75 basis points

National Housing Bank (NHB) has reduced its refinance rate by 75 basis points and enhanced the slab of individual housing loans from Rs.10 lakh to Rs.15 lakh w.e.f. March 15. 

The cut in refinance rate from 12.25 percent to 11.5 percent would help Housing Finance Companies (HFCs) to reduce their prime lending rate in order to pass the benefit to consumers. 

For construction or acquisition of dwelling units in rural areas the new refinance rates range between 9.5 percent and 11.5 percent for different loan slabs and between 10.5 percent and 11.5 percent in urban areas. For up-gradation and major repairs, the new refinance rates of NHB range between 10 percent and 12 percent for rural areas and between 11 percent and 13 percent in urban areas.  

NHB announces refinance scheme for Gujarat

The National Housing Bank (NHB) has announced a refinance scheme for people affected by the Gujarat earthquake in January this year. While housing refinance will be available at 6.5 percent, loans to state bodies for infrastructure reconstruction will attract 7.5 percent rate of interest.  

NHB proposes to provide both refinance and also get into direct lending for reconstruction in Gujarat. The scheme involves sanction of loans for repair and construction of dwellings which ranges between Rs.5 lakh for rural and semi urban areas and Rs.10 lakh for urban and metropolitan areas at 18 percent interest through housing finance companies. 

The Reserve Bank of India has already sanctioned a soft loan of Rs.1,000 crore, with a 15 year tenure. NHB has said that it will provide direct finance to state government agencies like the Disaster Management Authority, State Housing Board, State Development and Municipal Bodies.