ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Correcting Interest Rate Distortions

While the monetary authorities have sought to correct the distortions in the yield rates on government debt, they have not addressed the question of high interest rates on commercial sector bonds for which the FIs and PSUs have been mainly responsible. The situation calls for policy initiatives by the RBI.

Neglect of Bank Credit for Industrial Revival

Key Developments in Financial Markets THE operations of the Indian financial markets have undergone some significant changes in the recent period which have implications for the long-term growth of the real economy. These changes have spawned one of the most serious dichotomous situations in which the financial system has been nursing a surfeit of liquidity but the productive enterprises have been facing an acute shortage of funds now for the third year in succession. Foremost among the financial sector changes has been the ballooning of marketable debt instruments issued by the public financial institutions (FIs) and public sector undertakings (PSUs) at unreasonably high rates of interest. So long as this situation is not corrected and a degree of reasonableness restored to their interest rate structure, there is no hope for the manufacturing firms to acquire the required amount of liquidity from the banking system nor is there any hope for them to see equity market getting revived, Some of the large-size manufacturing firms may partake the benefits of the growth of debt instruments to acquire bank funds, but if the world of manufacturing activity is to inn its full circle with reasonable matching of demand and supply for goods, the credit requirements of the mass of small and medium enterprises, which constitute the backbone of our economy and which generally remain outside the purview of marketable debt instruments, have to be met. Field reports suggest that it is not being done, and whenever is - offered, is at unreasonably high rates of interest, particularly in relation to the current recessionary conditions, it is time that the issues arising out of (i) the issuance of costly debt instruments by FIs and PSUs, and (ii) the general neglect of bank credit as well as micro credit as an instrument of development, are given due attention, without which the revival of the industrial economy will remain a pipedream.

Mistimed Tightening of Prudential Norms

Policy Perspectives and Developments STICKING to the new ground rules set out in the April monetary and credit policy document, the RBI governor's latest policy statement confines itself to a factual midterm review of the macro-economic and monetary developments during 1998-99 without introducing any short-term policy measures. However, against the backdrop of the second Narasimham Committee report* a number of long-term banking sector reform measures, as also some structural changes in the operations of the money market, have been announced in the statement, Almost all of the reform measures concern the introduction of tighter prudential norms' Increase in the minimum capital to risk assets ratio (CRAR) from 8 per cent to 9 per cent, introduction of a 2.5 per cent weight for market risk in the holdings of government and approved securities, stricter classification of assets for provisioning purposes and a general provisioning of 0,25 per cent on standard assets are some of the measures proposed to be introduced by the year ending March 31,2000. These arc measures of an incremental and not earth shaking character; there cannot be any objection to them as desirable standards in the long run. But in an environment where the credit delivery system, particularly in its distributional goals, is choked, the emphasis on such rigorous prudential norms may further damage the process of credit supply specially for mediumand small-scale industries and the informal sector; the measures could have waited for a more congenial environment. Instead, a satisfactory approach should have been to study the way the prudential norms have been implemented so far and the kind of impact they have had on normal banking activities like lending, In the first place, these market- based norms in line with the international best practice have been imposed on the public sector banks in India without any modicum of organisational reforms and managerial autonomy. Nor have they been, secondly, given the freedom to go to the market to mobilise fresh capital.

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