The Reserve Bank of India on Tuesday cut the bank rate by 0.25 per cent to 6 per cent with effect from close of business hours.

The apex bank has also reduced the cash reserve ratio (CRR) by 0.25 per cent to 4.5 per cent beginning from the fortnight of June 14, RBI Governor Bimal Jalan told bankers while presenting the Monetary and Credit Policy for 2003-04 in Mumbai.

Jalan said the GDP growth is expected to be at 6 per cent, assuming satisfactory spatial distribution of monsoon.

The inflation is expected to be in the range of 5-5.5 per cent in 2004, he added.

Real interest rates are relatively low

Jalan said in view of the several structural constraints, the present nominal and real interest rates are relatively low. There may not be significant potential for further sizeble downward movement in interest rates.

On the payment of interest on eligible CRR balances on monthly basis, he said the first such payment would be made for the month of April 2003 covering the fortnights ended April  4and April 18 in May.

Pursuant to this, RBI has suitably modified interest claim statement to be submitted by banks.

Given the present uncertain geopolitical environment, RBI has decided to continue extending refinance facility to eligible export credit remaining outstanding under post-shipment rupee credit beyond 90 days and up to 180 days.

This facility was planned to be deregulated with effect from next month and will now be reviewed in October.

Jalan said for determination of benchmark prime lending rate, banks should take into account their actual cost of funds, operating expenses, minimum margin to cover regulatory requirement of provisioning/capital charge and profit margin.

Move to review PLR determination system

The system of tenor-linked PLR has been discontinued. The effective date for discontinuation and tenor-linked PLR would be further discussed with banks and a decision would be announced separately in due course, he added.

RBI proposes to review the system of determination of benchmark PLR by banks and actual prevailing spreads in September 2003.

NRE deposits

Referring to Non-Resident External deposits, Jalan said the maturity period of fresh NRE deposits would be one to three years in line with Foreign Currency Non-Resident (Bank) deposits with immediate effect.

This would also apply to NRE deposits renewed after their present maturity period, he added.

The RBI governor said for the present, it was proposed to continue with the policy of maintaining adequate liquidity in the system and a soft interest rate environment.

In case demand pressures emerge and the inflationary situation worsens, which hopefully would not be the case, the present Monetary and Credit Policy stance may have to be reviewed, he added.

Facilitating risk hedging by NRIs

In order to facilitate better risk hedging by NRIs and overseas corporate bodies (OCBs), it has been proposed to allow them to book cross currency forward contracts to hedge the balances held in their FCNR(B) accounts.

However, contracts once cancelled cannot be rebooked.

Referring to introduction of new over-the-counter (OTC) rupee derivatives, he said less complex OTC interest rate Rupee options should be permitted in the first phase.

Scheduled commercial banks, financial institutions and primary dealers would be allowed to both buy and sell options; corporates may sell options initially without being the net receivers of premium.

Detailed guidelines for operationalising recommendations of the working group would be issued in consultation with market participants, he added.

Urban co-operative banks

Referring to urban co-operative banks, Jalan said the apex bank has proposed to exempt both gold and small loans up to Rs 100,000 from the 90-day norm for recognition of loan impairment.

It has also been proposed to permit UCBs to place deposits with strong scheduled UCBs (other than banks classified as weak or sick) with certain conditions and detailed guidelines in this regard would be issued separately.

Jalan said RBI has also decided to revise the ceiling on unsecured advances by UCBs in order to provide greater flexibility.

In line with the recommendation of the Joint Parliamentary  Committee, it has been decided that UCBs would be given a maximum period of six months from the date of inspection report to remove the irregularities pointed out in all respects, failing which RBI would invoke the penal provisions.

UCBs have been advised to introduce concurrent audit with immediate effect.

RBI has also directed UCBs not to grant loans and advances (both secured and unsecured) to directors, their relatives, and firms/concerns/companies in which they are interested with immediate effect.

Existing advances extended prior to April 29 may be allowed to continue up to the date when they are due. These advances should not be renewed or extended further, he said.

Investment fluctuation reserve

Jalan emphasised that banks should take immediate measures to build up investment fluctuation reserve in a smooth and phased manner for better risk management.

On priority sector lending, RBI said dealers in drip irrigation system/agricultural machinery, irrespective of their location, would be eligible for such advances.

Home loans

Referring to housing loans, he said banks, with approval of their boards, would be free to extend direct finance to the housing sector up to Rs 10 lakh (Rs 1 million) in rural and semi-urban areas as part of priority sector lending.

Moving towards pure-interbank call/notice money market, RBI has proposed transition to stage II would be effective from fortnight beginning June 14, 2003, wherein non-bank participants would be allowed to lend, on average in a reporting fortnight, up to 75 per cent of their average lending in call/notice money market during 2000-01.

Strengthening the market

With a view to improving transparency and strengthening efficiency in the market, it has proposed that from fortnight beginning May 3, it would be mandatory for all negotiated dealing system (NDS) members to report all call/notice money market deals on NDS.

Deals done outside this system have be to reported within 15 minutes.

Full compliance with the reporting requirement would be reviewed in September 2003. In case, there is repeated non-reporting of deals by NDS member, it would be considered whether such deal should be traded as invalid with effect from a future date.

Mutual funds

Jalan said on overseas investment by mutual funds it has been decided to accord general permission to mutual funds for their investments within the cap, once the Securities and Exchange Board of India's approval has been obtained.

This general permission would be available until further notice.

Indian corporates and resident individuals would also be permitted to invt in rated bonds/fixed income securities of listed eligible entities abroad subject to certain conditions.

RBI has also decided to allow overseas investors making long-term investments to hedge their forex exposures in India, pending investment, by entering into forward sale contracts with banks in India.

Entities, which have transactions denominated in foreign currency but settled in rupees, have been permitted to book forward contracts. Such contracts should be held till maturity and cash settlement would be made on the maturity date.

Providing more flexibility

Jalan said in order to provide further flexibility to both issuers and investors in commercial paper market, RBI has proposed that non-bank entities, including corporates may provide unconditional and irrevocable guarantee for credit enhancement for commercial paper (CP) subject to fulfilling certain conditions.

Banks are allowed to invest in CP guaranteed by non-bank entities provided their exposure remains within the regulatory ceiling as prescribed by RBI for unsecured exposures.

On the risk-based supervision (RBS), Jalan said it is proposed to implement RBS of a few select banks on pilot basis during April-June 2003.

Based on the experience gained, RBS would be extended to all banks in a phased manner.

The scheme of prompt corrective action has been put in place initially for a period of one year and would be reviewed in December 2003.

In order to increase the efficacy of liquidity adjustment facility (LAF), it was desirable to rationalise multiplicity of rates at which liquidity was absorbed or injected.

It has been proposed that back-stop interest rate would be at the reverse repo cut-off rate at which funds were injected earlier during the day in the regular LAF auctions.

Where no reverse repo bid was accepted as part of LAF auction, the back-stop interest rate would generally be two percentage points over the repo cut-off rate of the day under LAF.

On the days, when no bids for repo or reverse repo auctions are received/accepted, the back-stop interest rate would be decided by RBI on an ad hoc basis.

It is expected that back stop rate would be lower by one per cent over the present rate with these changes.

PTI