Monetary Policy : 2003-2004

Shri Y.V. Reddy, Governor, Reserve Bank of India on November 03, 2003 anounced the Mid Term Review of Monetary Policy for the Year 2003-2004 wherein he proposed to continue with the overall stance of the annual policy statement of April 2003. Some of the major highlights of the policy are as under :-

  • GDP growth in 2003-2004 placed at 6.5 - 7% with an upward bias.
  • Inflation projected for policy purposes at 4.0 - 4.5%, with a possible downward bias.
  • Money supply (M3) growth within the projected level as envisaged in April.
  • Bank Rate, CRR unchanged.
  • Report of the Internal Group on liquidity adjustment facility being placed on the RBI website for wider dissemination and comments.
  • IBA to advise banks on benchmark PLR.
  • Panel proposed to suggest ways to improve credit flow to agriculture and small scale sectors.
  • Further move towards pure inter-bank call/notice money market.
  • Banks to ensure hedging of foreign currency loans to corporates above $10 million except for exporters and for forex expenditures.
  • Banks advised to quickly build up IFR.
  • Road map for financial institutions to adopt 90 days norm for recognition of loan impairment.
  • Standing Technical Advisory Committee on Financial Regulation for both banks and non-banks proposed.
  • Identification and special monitoring system for Systemically Important Financial Intermediaries (SIFIs) proposed in co-ordination with RBI, SEBI and IRDA.
  • Banks advised to constitute Ad-hoc Committees to improve customer services including review of RBI regulations impinging on customer services.
  • Working Group proposed to address regulatory and supervisory issues pertaining to Development Finance Institutions (DFIs).
  • Extension of good corporate governance practices to PDs, NBFCs and FIs.
  • RTGS system scheduled for introduction in January, 2004.
  • Select private banks authorised to conduct government business for public convenience.
  • Payment of tax refunds through electronic clearing services (ECS) to be introduced.

In order to improve the flow of credit to the SSI sector it is proposed (a) to enhance the loan limit to SSIs from Rs.15 lakh to Rs.25 lakh for dispensation of collaterals requirements; (b) Interest rates on deposit of foreign banks placed with SIDBI towards their priority sector shortfall reduced from 6.75% to 6%; (c) All New loans granted by banks to NBFCs to be reckoned as priority sector lending.

RBI advice on waivers for OTS

RBI has advised the Industrial Development Bank of India that the overdue/ penal interest, liquidated damages, other charges, etc. debited to the sticky borrower’s account after the ‘material date’ (i.e. the date of transfer to the protested bills account or the date when the account was categorised in the doubtful category, whichever was earlier) could be waived with the approval of its board.

The Central bank has issued clarifications in this regard on the revised guidelines on one-time settlement (OTS) to the IDBI.

Further the outstanding balance for the purpose of OTS of chronic non-performing assets (NPAs) should comprise the entire amount which fell due from the borrower till either the date of transfer to the protested bills account or the date when the account was categoriesed in the doubtful category, whichever was earlier.

Arcil to float 9 funds to deal with bad loans

The Asset Reconstruction Company of India (ARCIL) is to complete acquisition of the first tranche of bad loans by mid-November. “Arcil plans to float nine special purpose vehicles which would be specific to nine companies”, said Shri S. Khasnobis, President and Chief Operating Officer Arcil, at a seminar on “corporate debt restructuring mechanism and ARC experience sharing” organised by the Indian Banks’ Association.

Shri Khasnobis said nine funds would be floated with a value of around Rs.2,000 crore to take on bad loans from the books of participating banks. The nine companies include Birla VXL, Modern Denim, Core HealthCare, Shree Rama Multitech, GSI (India), Precision Fasteners, Uniworth, Kalaynpur Cements and GSAI. The acquisition of the assets and selling them to the qualified institutional investors would happen simultaneously. Initially the seller of the loan itself would be the subscriber to the units. “The valuation and negotiation on the pricing of these companies is complete”, he said “The issue for subscribing to the units issued by nine SPVs will open on October 27, for two weeks”.

In a parallel development, foreign funds have shown interest in taking exposure in the stressed assets that are restructured by the corporate debt restructuring forum. Disclosing this, Shri Siby Antony, CGM, in charge of CDR cell, said that the foreign funds and senior IDBI officials are in the initial stage of discussion. He said 85 projects with aggregate debt of Rs.56,414 crore were considered at CDR cell and of this 55 projects with aggregate debt of 47061 crore were restructured. Besides this, an inter creditor agreement with the foreign banks would be signed by next month at the CDR cell. The existing inter-creditor agreement would be amended following discussion with the senior RBI officials and representative of foreign banks.

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

SIDBI vide its circular dated September 05, 2003 has decided to revise the rates of interest on refinance against term loans sanctioned to the units in small scale sector. The modified interest rate structure is given as under : -

under Refinance/ Line of credit [LOC] Scheme


Revised Interest Rate Structure Under Refinance/ Line of credit [LOC] Scheme
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 (% p.a.)
SIDBI rate of
interest on
refinance (% p.a.)
[i] Upto Rs. 50,000/- With a maximum spread of 3% over and above applicable refinance rate 8.25
[ii] Above Rs. 50,000/- and upto Rs.2 lakh 8.75
[iii] Above Rs. 2 lakh and upto Rs. 25 lakh
[iv] Above Rs. 25 lakh
As may be decided by the PLI



B. Refinance against term loans in respect of projects/activities eligible for assistance under TDMF and ISO 9000 Schemes

Interest on term loans

[% p.a.]
[i] Upto Rs. 50,000

Not to exceed SIDBI’s PLR i.e. 11.50%



[ii] Above Rs. 50000 and upto Rs. 2 lakh
[iii] above Rs. 2 lakh

* 2% lower than SIDBI’s PLR

The revised rates of interest will be applicable on all disbursements made under LOC by SIDBI on or after September 08, 2003. Refinance on term loan, which have been partly disbursed before September 08, 2003 will continue to carry the pre-revised applicable rates of interest.

The PLIs have been asked to continue to charge interest rate, for loans upto Rs.50,000/- and above Rs.50,000/- and upto Rs.2 lakh, with a maximum spread of 3% over and above applicable refinance rates, which are presently revised to 8.25% p.a., and 8.75% p.a. respectively, and for loans above Rs.2 lakh and upto Rs.25 lakh and above Rs. 25 lakh depending upon the risk perception in each proposal SIDBI has, however, instructed that the interest rate to the ultimate borrower in respect of loan above Rs.2 lakh is reasonable in relation to the cost of funds and risk perception.

Technology Upgradation Fund Scheme (TUFS)

SIDBI vide its circular dated 17.10.2003 has forwarded the additional norms issued by Ministry of Textiles, GoI vide its circular No.1 & 7 on the Refinance Scheme for Textile Industry under Technology upgradation Fund wherein additional banks / FIs have been coopted for the scheme as under:

The Sutex Cooperative Bank Ltd.; The United Western; The Lakshmi Vilas Bank Ltd.; Apna Sahkari Bank Ltd.; The Nasik Merchants’ Co-operative Bank (NAMCO Bank) and Dombimla Nagari Sahakari Bank Ltd.

Swarojgar Credit Card System

Pursuant to the Hon’ble Prime Minister’s announcement in his address to the nation on the Independence Day, it has been decided to introduce a new credit facility for fishermen, rickshaw owners, self employed persons, etc. A model scheme called the “Swarojgar Credit Card (SCC) Scheme’ has since been prepared by the National Bank for Agirculture and Rural Development (NABARD) and approved by the Ministry of Finance. All scheduled commercial banks have been advised to introduce such a scheme on the lines of the model scheme.

Model Scheme


The SCC scheme aims at providing adequate and timely credit, i.e. working capital or block capital or both to small artisans, handloom weavers, service sector, fishermen, self employed persons, rickshaw owners, other micro-entrepreneurs, etc. from the banking system in a flexible, hassle free and cost effective manner.


The Scheme should be implemented by all commercial banks, state co-operative banks, district central co-operative banks (DCCBS), primary agricultural co-operative societies (PACS), state co-operative agricultural rural development banks (SCARDBs) primary co-operative agricultural rural development banks (PCARDBs) and scheduled primary co-operative banks.

Nature of financial accommodation

The credit facility extended under the Scheme would be in the nature of a composite loan including term loan/revolving cash credit.

The term loan should be provided for meeting the investment requirements and it should be repaid within five years in suitable instalments.

The revolving cash credit should be fixed taking into account the operating cycle/nature of the investment and available balance after sanction of term loan.


The ceiling per borrower for composite loan is Rs.25,000. The initial investment in fixed assets and/or working capital requirement/recurring expenditure of the borrower should be taken as the base for fixing the limit. The working capital/recurring expenditure limit may be in the form of a revolving cash credit and fixed as a percentage of the turnover divided by the number of operating cycles per annum. A component for consumption credit could be built in keeping in view the value of family labour in productive activity. The total limit should have a relationship between the projected net earning and the repayment capacity of the borrower.

Validity and Issue

The SCC would normally be valid for five years subject to satisfactory operation of the account and could be renewed on a yearly basis through a simple review process. The operations in the account, however, should be regular.

The beneficiaries under the scheme would be issued a laminated credit card and a pass book incorporating the name, address, borrowing limit, validity, etc. This will serve as an identity card as well as facilitate recording of the transactions on an ongoing basis. Fees towards issue of card/processing should not exceed Rs.50.

Renewal of working capital limits

  • Limits could be renewed annually based on the amount credited to the cash credit account and the repayment performance in the term loan account.
  • Term loan component could be enhanced within the overall limit in case of need subject to satisfactory repayment performance of the borrower.
  • The revolving cash credit to the extent of working capital repaid may be renewed within the overall ceiling of Rs.25,000.00 and it should normally be repaid within twelve months from the date of drawal. Where necessary, the working capital component could be enhanced within the overall ceiling to provide for escalation in the cost of inputs, etc. subject to satisfactory repayment performance.
  • No drawal should be permitted if revolving cash credit remains outstanding for more than twelve months.
  • The aggregate credits in the account during the twelve months’ period should normally be equal to the maximum outstanding in the working capital component plus the instalment of the term loan availed of, if any.


  • Banks would have absolute freedom to select the clients for the card. There would be no subsidy from the government under this scheme.
  • The borrower may avail the credit facility as per his/her requirements, i.e. either term loan or working capital loan or a combination of both.
  • The issuing branch should maintain a ledge account for each SCC account holder. The term loan component and working capital component should be accounted for separately. The operations in the account should generally be through the card issuing branch. Banks may at their discretion, however, permit operations through the designated branches, taking into account the convenience of the clientele.
  • Withdrawal from the account should be through withdrawal slips/cheques. The SCC and the pass book should be produced each time cash is withdrawn.
  • Opening of savings bank account should not be a precondition for issue of SCC. In case, however, a SCC holder desires on his/her own to open a savings bank account, he/she may be allowed to do so.


Beneficiaries under the scheme would automatically be covered under the group insurance scheme and the premium would be shared by the bank and the borrower equally. Each bank may negotiate the terms of insurance with a company of its choice on a national or regional basis.

Security/margin/interest/prudential norms

Security, margin, rate of interest and prudential norms would be applicable as per the Reserve Bank’s norms.


Banks are required to report the monthly progress to the regional offices of NABARD, it being the nodal agency for monitoring the scheme.

Entry of Banks into Insurance Business

The Reserve Bank has advised all scheduled commercial banks that they need not obtain the Reserve Bank’s prior approval for engaging in insurance agency business or referral arrangement without any risk participation. The banks should, however :

(a) Comply with the Insurance Regulatory and Development Authority (IRDA) regulations for acting as ‘composite corporate agent’ or referral arrangement with insurance companies.

(b) Not adopt any restrictive practice of forcing its customers to go in only for a particular insurance company for assets financed by the bank. Customers should be allowed to exercise their own choice.

(c) Enter into an agreement with the concerned insurance company for allowing use of its premises and making use of the existing infrastructure of the bank. The agreement should be for a period not exceeding three years at the first instance. The bank should have the discretion to renegotiate the terms depending on its satisfaction with the service or replace it by another agreement after the initial period. Thereafter, private sector banks would be free to sign a longer term contract with their Board’s approval of the Government of India.

(d) Prominently state in all publicity material that participation by its customers in the insurance products is purely on a voluntary basis. There should be no ‘linkage’ either direct or indirect between the banking services offered by the bank to its customers and use of the insurance products.

(e) Ensure that risks, if any, involved in insurance agency/referral arrangement should not get transferred to the business of the bank.

Banks satisfying the eligibility criteria framed by the Reserve Bank and intending to set up insurance joint ventures with equity contribution on risk participation basis or making investments in insurance companies for providing infrastructure and services support are, however, required to obtain the Reserve Bank’s prior approval.