fms final project

8/14/2019 Fms Final Project

http://slidepdf.com/reader/full/fms-final-project 1/42

FINANCIAL MARKETS AND SYSTEMS

A PROJECT

ON

CREDIT CONTROL POLICY OF RBI

SUBMITTED TO :

Prof. Raju Indukukoori Submitted by:

GROUP-3

Anirban Dhar

Irisha Boruah

Misbah Ul-Haq

Ansari

1



Chaitanya G.

ACKNOWLEDGMENT

We express our heartfelt gratitude to Prof. Raju Indukoori of IFIM B-school, Bangalorefor giving us the opportunity to undertake a project on the CREDIT CONTROL

POLICY OF RBI under his guidance and observation.

We are also highly thankful to him for all his help, support and inspiration in the

effective completion of our project.

.

Anirban Dhar

Irisha Boruah

Misbah Ul Haq Ansari

Chaitanya .G

2



CONTENT

1) Introduction

2) Methods of credit control

Quatitative or traditional method

Bank rate policy

Refinance policy

Variation in cash reserve ratio- CRR & SLR

Open market operations

Repo and Reverse repo rate

Fixation of lending rates

Credit Sequeenze

Qualitative or Selective methods

Credit rationing

Moral Suasion

Direct Action Method

Credit Authorization scheme

3) Role of Credit policy of RBI in Revival And Stabilisation of economy

4) ICRA comment on RBI Annual Policy Statement for 2007-08

5) Credit policies of RBI in July 2009-10

6) Conclusion

7) References

3



INTRODUCTION

Credit creation is one of the major functions of the commercial banks. Higher the credit

creation, higher will be the profits. It is this profit that prompts the commercial banks to

resort to credit creation. This credit creation brings about price distortions and instability

resulting in economic imbalancement in the country. Now it becomes the onerous

responsibility of RBI to regulate credit creation and establish price stability and

tranquillity in the economy. To achieve this objective, RBI has developed its credit

policy

The RBI Credit & Monetary Policy directly impacts the banking and financial sector

which include banks, financial institutions, NBFC’s, primary money market dealers and

dealers in forex markets etc.

RBI Credit Policy also affects individuals & corporates. If RBI's policy results in

tightening of money supply it affects borrowers more as banks become strict in lending.

Also at times banks resort to increase in lending rates. However in such scenario

depositors generally gain by increased deposit rates.

Main objective of RBI credit policy is to control inflation, ensure adequate supply of

credit to encourage growth of the economy and maintain financial stability. If RBI

policy today is able to even partly achieve the above objectives it will be for the good of

all.

Historically, the Monetary Policy is announced twice a year - a slack season policy

(April-September) and a busy season policy (October-March) in accordance with

agricultural cycles. These cycles also coincide with the halves of the financial year.

Initially, the Reserve Bank of India announced all its monetary measures twice a year in

the Monetary and Credit Policy. The Monetary Policy has become dynamic in nature as

RBI reserves its right to alter it from time to time, depending on the state of the

economy.

Need for credit control in the Indian economy

1. To encourage the priority sectors for overall growth

4



2. Facilitate the flow of adequate volume of bank credit to its industry, Agriculture and

trade

3. To keep Inflation pressure under check

4. To ensure that Credit is not diverted to undesirable purposes

5. To facilitate the Development of Indian economic growth

The RBI has in its armoury certain weapons that could help in the process of credit

control. These methods are applied against the commercial banks of the country, which

resort to credit creation infatuated by profits. These weapons of credit control are of two

types and they are very powerful and influential in their approach. They are:

• Quantitative or traditional control and

• Selective or qualitative controls,

Quantitative or traditional control

The quantitative or traditional credit control methods affect all the banking institutions

generally. They aim at controlling credit by controlling the money supply and quantum

of loans and advances given to borrowers. The various quantitative methods of credit

control followed by RBI are:

• Bank rate policy

• Refinance policy

• Variation of cash reserve ratio

• Open Market Operations

• Fixation of Lending Rates

• Repo and Reverse repo rates

BANK RATE POLICY

5



The RBI provides financial accommodation in the form of rediscounting of bills of

exchange and promissory notes and loans and advances to scheduled commercial and

co-operative banks, SFCs, IDBI,IFC, EXIM Bank and other approved financial

institutions for financing bonafide internal and external commercial, trade and

production transactions.

The Bank rate is the basic cost of refinance and rediscounting facilities. Section 49 of

the Reserve Bank of India Act, 1934, defines Bank Rate as the standard rate at which it

(the Reserve bank) is prepared to buy or rediscount bills of exchange or other

commercial papers eligible for purchase under this Act. As the provision regarding

rediscounting of bills by the Reserve Bank had remained inoperative for a long time in

the past, the rate charged by Reserve Bank on its advances to banks has been treated as

the Bank Rate.

A change in the Bank Rate – upward or downward — usually has an immediate effect

on the costs of credit available to the commercial banks from the central bank. A high

Bank rate is intended to raise the cost of Reserve Bank accommodation to banks, which

in turn raises their own lending rates to the borrowers. Discouraged by high rate of

interests, the borrowers consequently reduce the level of their borrowings from the

banks which in turn bring down the level or re-finance secured by them from the central

bank. Thus a high Bank rate is intended to result in contraction of bank credit.

Theoretically, the Bank rate happens to be prime rate – it is a pace setter to all other

rates of interests in money market, i.e. all other rates of interest generally move in the

same direction in which then Bank rate moves. When the central bank intends to follow

the policy of high cost of money, it raises the Bank rate first, which is followed by rise

in all other rates of interest. Such a policy is called the policy of dear money. The

objective of such a policy happens to make money scarce and costly so as to restrict its

use to the deserving purposes only.

In the early years, financial accommodation from bank was largely provided at bank

rate. Subsequently, owing to the differential rates prescribed for various sector-specific

refinance facilities as also due to the absence of a genuine bill market, the Bank rate

application was confined to:

6



• The ways and means advances to the state governments

• Advances to primary co-operative banks for SSI , and

• State financial corporation besides penal rates on shortfalls in reserve

requirements.

REFINANCE POLICY:

Discretionary control of refinance is used to regulate the cost and availability of

refinance, and to change the volume of lendable resources of banks and other financial

institutions. The refinance policy has to take care of seasonal need for funds also. The

major changes in the refinance policy affected by bank in different periods of time are

highlighted below:

1951-60: The cost of refinance was changed twice (in 1951 and 1957) during

1951-60. During this period, the Bank stopped buying government securities

from banks, which the banks sold for meeting their seasonal needs for funds,

and, instead, introduced the policy of giving advances against the collateral of

these securities. It also introduced in 1952, the Bill Market Scheme which

encouraged the resources of banks to the RBI for financial accommodation.

1960-64: The Bank rate was raised to 5% in two stages during this period. The

RBI also introduced in October 1960 a new system of raising refinance, namely

7



Quota-cum-Slab Rate system, which linked the availability and cost of refinance

to the maintenance of required cash reserves by the banks. This was done to

ensure that the banks didn’t nullify the impact of changes in the cash reserve

ratio by borrowing more from the RBI. Under this system the Bank use to fix

borrowing quotas for banks with graded cost of refinance. The basic quota used

to be fixed at a certain percentage of the average required statutory cash reserves

and it used to be available at the Bank rate. For the use of the second or third or

fourth quota, the RBI interest rate used to be increased by certain percent points.

The availability of refinance beyond the basic quota was at the discretion of the

Bank and was not automatic. This system had only a short life-span; it was

abandoned in September 1964.

1964-75: The Bank rate was substantially raised from 5% to 9% during this

period.

Since the Quota-Cum-Slab Rate system didn’t prove very effective, it was

abandoned and replaced by a new system, namely Net Liquidity Ratio (NLR)

system under which the cost of refinance came to be linked with ratio of the

bank’s net liquid assets to the aggregate demand and Time liabilities(DTL) of the

bank. The policy laid down that if NLR declined by a given percentage point

below a given prescribed minimum level, the RBI would charge a stipulated

additional rate of interest over and above the Bank rate. The refinance rate on the

entire amount of refinance would increase with every successive prescribed

decline in the minimum NLR. The cost of refinance was related to the previous

borrowing by the bank from RBI. Under this system RBI could increase the cost

of refinance by increasing the minimum NLR, the penal interest rate, and the

Bank rate, and also by reducing the extent of drop in NLR for applying the penalinterest rate..This system was in operation between 1964 and November

1975.The NLR was increased from 28% in 1964 to 39% in 1974.The most active

use of this ratio was made in 1970 and 1973 when the NLR was increased by 10

% points.

The Bank’s refinance policy during this and subsequent periods had two

components: one for the preferred sectors and other for general category of

8



borrowers. The RBI has been providing refinance at the Bank rate or

concessional rate on a selective basis in respect of Bank loans to preferred

sectors such as exports, agriculture, food procurement, storage, distribution and

small industries. However, over the years, refinance even to these sectors has

been made available in diminishing quantity and at an increasing cost. This has

been achieved by introducing two types of formula:

a) Each time, the credit to priority sectors over and above the credit at the

prescribed base period only was made eligible for refinance, and

b) Each time, only a certain proportion of the increase in bank credit over the

average level in the prescribed base period was made eligible for refinance.

The Bank has been changing the base period, the floor level of advances, the

proportion of refinance and the cost of refinance from time to time.

In the general category, refinance used to be normally available on automatic

basis for a reasonably long period of time. However in November 1973,

refinance facilities were made available on a semi-discretionary basis, and

quantitative ceilings were imposed on it. The RBI started using discretion in

respect of volume, maturity and cost of refinance on the basis of credit deposit

ratio of bank, the extent of its fulfilment of credit allocation targets, general

compliance of with the bank’s policy objectives and directives, efforts to

mobilise deposits, efforts towards purposeful credit planning, difficulties faced

in respect of operations in backward areas, and so on. Simultaneously, the

virtually automatic refinance came to be restricted to a stipulated ceiling known

as basic refinance quota which had two components:

a) The basic borrowing limit of one percent of bank’s DTL, and

b) The basic bills rediscounting quota of 10 percent of total bills purchased

and discounted, both as on a prescribed date. This refinance quota used to

be provided at the rate of interest different from the Bank rate.

1976-90: The Bank rate was raised from 9% to 10% in 1981, and it remained

unchanged till 3rd July 1991 on which day it was raised to 11%.The refinance

9



policy became tighter during this period. In May 1977, the basic automatic

rediscount quota was discontinued and the rediscount facility was placed entirely

on a discretionary basis. Similarly the basic automatic borrowing quota was

discontinued in June 1978, and the system of stand by refinance for not more

than 3 days was introduced in its place. The stand by refinance is made available

at the Bank rate. Since June 1978, the RBI has really become a lender of last

resort because since then it began to give refinance only “in very special

situation of extreme need”, and “very sparingly”. In March 1979, the access to

refinance and rediscounting facilities for banks defaulting on CRR and SLR was

discounted and a system of penal rate of interest of 3% over and above the Bank

rate on the outstanding refinance equivalent to shortfall in CRR and SLR was

introduced. Refinance policy during the 1980s concentrated on raising the cost of

refinance.

The main points about the Bank rate refinance policy during 1951-90 may now

be summarised. The Bank rate was changed only nine times during the 40 years

since 1951.It remained static particularly in the periods 1952-56,1958-62,1975-

80, and after 1982.During the 1980s,interest rate on bank deposits and loans

were changed without making any change in the Bank rate. The Bank’s wariness

about changing the bank rate led to the introduction of innovative techniques like

quota-cum-slab rate system and net liquidity ratio system. The non readiness to

change the bank rate frequently stemmed from the bank’s desire not to adversely

affect the yields and the market for government securities. The new system of

discretion-cum-quantitative rationing of refinance diminished the importance of

the Bank rate further.

The atrophy of Bank rate resulted in the creation of an increasingly complicated

maze of measures to control refinance. The traditional Bank rate technique was

simple to operate. But it was accompanied by multiple and differential refinance

rates chargeable to different banks. The new techniques of control of refinance

resulted in the loss of “announcement effect” of the Bank rate. There was, hence

an urgent need for simplification of refinance policy and for rehabilitating the

Bank rate as a prime tool of money policy.

10



1991-96: Bank rate was raised by 2% points from 10% to 12 % in two stages in

(July and October) 1991. Thereafter it again remained unused for five years. The

year 1997 will have a special place in the history of Bank rate in India because

a) One of its most active uses was made in this year

b) This use was in the downward direction, and

c) Maximum reduction in it in any one year since its inception occurred in this

year (from 12% to 9%).

The reactivisation or the revival of the Bank rate has now taken place also in

the sense that the interest rates of the significance in the Indian economy

have come to be linked with it. It has become the “signal rate” and also the“reference rate” to which all interest rates on advances from the Bank,the

penal rates on the shortfalls in the reserve requirements, and the maximum

term deposit rates of banks are linked.

1997-2004: This is unique period in the history of use of Bank rate in India

because it witnessed unprecedented reduction in the Bank rate. It was reduced

from 10% to 6% through active and frequent changes. It reached the lowest level

in 2003since 1974. The Bank rate was changed 16 times in about 7 years

beginning with 1997.

VARIATION OF CASH RESERVE RATIOS

The present Banking system is called a “fractional reserve banking system”, because the

banks need to keep only a fraction of their deposit liabilities in the form of liquid cash.

The authorities earlier use to change this fraction mainly for the purpose of ensuring the

safety and liquidity of deposits. Over the years, however it has become an important and

effective tool for directly regulating the lending capacity of banks. The RBI has been

using two ratios as an instrument of credit:

11



1) Cash Reserve Ratio, and

2) Statutory Liquidity Ratio.

1) Cash Reserve Ratio (CRR): The CRR refers to the cash which banks have to

maintain with the RBI as a certain percentage of their demand and time

liabilities. Till 1962, a separate CRR was fixed in respect of demand liabilities of

5% and time liabilities of 2%. The Bank had the powers to vary these ratios up to

a maximum of 20% and 8% respectively. Subject to these ceilings, the RBI

could ask banks to maintain with itself additional reserves as a specified

percentage of additional demand and time liabilities after a certain specified date.

This marginal or incremental CRR cannot exceed 100 percent. The Bank didn’t

make much use of these powers except in March and May 1960 when a marginal

CRR of 25 percent and 50 percent, respectively was imposed. They were later

withdrawn in two stages, in November 1960 and January 1961.

In 1962, the separate CRRs were merged and one CRR came to be fixed as a

certain percentage of both demand and time liabilities with the maximum of

15%. The rules regarding the marginal CRR were not changed. The actual

minimum CRR fixed in 1962 was 3%. The CRR is applicable to all the

scheduled banks including scheduled cooperative banks and the Regional

Rural Banks (RRBs), and non scheduled banks. However, cooperative

banks, RRBs, and non-scheduled banks have to maintain CRR of merely 3%

and so far it has not been changed by RBI. The CRR is applicable to various

NRI deposit accounts also but the level of CRR in their case differs from

CRR for domestic deposits, and also among themselves.

The RBI has powers to impose penal interest rates on banks in respect of

their shortfall in the prescribed CRR. The penal interest is normally 3%

above the Bank rate for the first week of default and 55 for the subsequent

weeks till the default is made good. In addition the bank can disallow fresh

access to its refinance facility to defaulting banks and charge additional

interest over and above the basic refinance rate on any accommodation

availed of, and which is equal to the shortfall in CRR. In addition from

12



January 1985, default in CRR results in graduated penalty by way of loss of

interest on the defaulting bank’s cash balances.

The RBI pays, since 1973,at its discretion, interest on that portion of cash

reserves which is the difference between the prescribed CRR (average plus

marginal) and the minimum CRR of 3%,provided the bank has not defaulted

in respect of maintaining the prescribed CRR. Interest is not paid on excess

reserves.

The technique of CRR remained almost completely unused from its

inception till 1972.Since then, however, it has been actively used, mostly in

the upward direction. The CRR was raised in stages from 3% in 1972 to 11%in 1988. A major change in CRR was made with effect from 1 July 1989;

it was not only raised by as many as 4 percent points but also the multiple

prescriptions (one CRR for domestic deposit, another for NRI accounts,

additional CRR) were done away with. In that year the maximum CRR

reached the maximum permissible level of 15%. Subsequently, the Bank

reintroduced the practice of prescribing the marginal CRR. In May 1991, it

directed the banks to maintain with effect from 4 May 1991, an

incremental CRR of 10 percent of the increase in net DTL over the level as

on 3 May 1991.

After remaining unused during 1950-72, and being actively used in the

upward direction during 1973-89, the CRR began to decline during 1993-98,

when it was reduced from 15% to 10%. In 1996, the RBI had offered to cut

the CRR by 3 to 4 percentage points as demanded by the banks if they were

willing to give up the refinance facility they had with the Bank. In other

words, a new idea of swap between CRR and refinance techniques was

mooted. After 1998 also, the CRR was actively used , and a reduction from

about 10% to 4.5% was effected in it by March 2004. CRR was used as

many as 15 times in 1980s, 22 times in 1990s and 12 times in and after

2000. Like the bank rate, the CRR reached its lowest level in 2003 since

1974.

13



The interest rates paid by the Bank on eligible cash reserves has been raised

in stages from 4.75 % in 1973 to 10.5 % in 1989, which has been higher than

the Bank rate during 1985 to 1989. Of late, the Bank has realised that the

payment of high rate of interest on cash balance has tended to attenuate the

effect of raising CRR. Therefore, it introduced the following two tier

formula with effect from Apr 1990: The Bank would pay

a) 10.5 percent on cash balances based on based on net DTL as on 23rd

March 1990 and

b) 8 percent on cash balances maintained on the increase in net DTL

after that date. Along with these measures, the Bank has softened the

scheme of graduated penalties on the shortfall in the CRR.

Subsequently this was notified and the Bank to cease to pay any

interest on the incremental cash balances beyond 23 rd March 1990.

The effective rate of interest on the entire cash balances worked out

to be about 3.5% from 1991 to October 1997. The credit policy

announced on Oct 1997 rationalised the system of payment of

interest rate on eligible CRR balances, and stipulated that with effect

from 25 Oct 1997, banks will be paid interest at the rate of 4 % p.a

on eligible cash balances maintained with the RBI. This rate was 4%

till Apr 2001, 6% till Nov 2001 and it was fixed to be equal with the

Bank rate thereafter.

2) Statutory Liquidity Ratio (SLR): In addition to CRR, the RBI had made active

use of another ratio, namely SLR. While the CRR enables the Bank to impose

primary reserve requirements, the SLR enables it to impose secondary and

supplementary reserve requirements, on the banking system. There are three

objectives behind the use of SLR:

a) To restrict expansion of bank credit

b) To augment banks investment in government securities and

c) To ensure solvency of banks

14



Through variations in SLR, the Bank is in a position to insulate a part of the

government debt from the open market impact because banks are then

prevented from disinvesting government securities in favour commercial

credit.

The SLR is the ratio of cash in hand balances in current account with SBI,

its subsidiaries, other nationalised banks and the RBI; gold and

unencumbered, approved securities i.e., central and state government

securities, securities of local bodies and government-guaranteed securities to

total DTL of banks. Between 1949 to 1962, while calculating SLR, no

distinction was made between cash on hand and balances held with RBI to

meet the CRR requirements. In 1962, a new definition of liquid asset as

given above was adopted. The SLR, like CRR, is applicable to the

cooperative banks, non-scheduled banks, and the RRBs, but it is maintained

at a constant level of 25% in their case. It is also applicable to foreign

currency (Non resident) account (FCNRA) and non-resident (external) rupee

account (NREPA) deposits but the levels in their case differ from each other

and from the general level. While SLR defaults don’t invite penal interest

payments and the loss of interest on cash reserve, they do result in

restrictions on the access to refinance from RBI and in the higher cost of

refinance. The RBI is empowered to increase the SLR for scheduled

commercial banks up to 40%.

The SLR remained at the level of 20% between 1949 to 1962 in terms of the

definition then prevailing. Thereafter it has been raised frequently and

subsequently from 20% in 1963 to 38.5% in 1990.

As in the case of CRR, the post 1991 period is characterised by a declining

phase for SLR also; its level was reduced and it came to be much criticised

during this phase. After 1992, banks were required to maintain SLR based

on multiple prescriptions. The Oct n1997 credit policy rationalised this

system of multiple rates of SLR by collapsing them into a single prescription

15



or uniform SLR of 25% of banks entire net DTL. SLR has remained

unchanged at 25% since 1997 till today.

OPEN MARKET OPERATIONS (OMO)

Open market operations are the means of implementing monetary policy by which a

central bank controls its national money supply by buying and selling government

securities, or other financial instruments. Through the open market sales and purchases

of government securities , the RBI can affect the reserves position of banks , yields on

government securities , and volume and cost of bank credit. Technically the bank can

conduct OMO’s in Treasury Bills, state government securities, and central government

securities ; but in practice, they are conducted only in central government securities of

all maturities. The securities directly bought by the RBI at the time of issue of loans are

excluded from the definition of OMO’s.

Goals and objectives : The OMO’s have both monetary policy and fiscal policy goals.

The multiple objectives include :(a) To control the amount of and changes in bank credit

and monetary supply through controlling the reserve base of banks, (b) To make bank

rate policy more effective, (c) To maintain stability in government securities market, (d)

To support government borrowing programme.

(Rs crore)

Year Purchases Sales Net

sales(-)/Net

purchases(+)

Total

operations

1955-

56

22 38 +6 116

16



1970-

71

207 313 -106 520

1980-

81

454 796 -342 1250

1991-

92

3245 7327 -4082 10572

2000-

01

4471 23795 -19324 28266

2002-

03

------ 53780 -53780 53780

OMOs have indirectly helped in the regulation of supply of bank credit to the private

sector in two ways . First the bank has often conducted OMOs for growing or switching

operations , i.e., the sale of long term scrips in exchange for short- term ones. This has

helped to lengthen the maturity structure of government securities , which, in turn, has

been favorable for the working of monetary policy. Second, the volume of the bank’snet sales (Sales-Purchases) of government securities has increased over the years , The

above table shows the bank’s purchases , sales and net sales of government securities

over the years . To the extent that net sales were positive and have increased

substantially during this period , OMOs have helped in regulating the flow of bank

credit to the private sector.

REPO AND REVERSE REPO RATE

Whenever the banks have any shortage of funds they can borrow it from RBI. Repo rate

is the rate at which commercial banks borrow rupees from RBI. In other words it is the

rate at which the RBI infuses cash into the banking system. A reduction in the repo rate

will help banks to get money at a cheaper rate .When the repo rate increases borrowing

from RBI becomes more expensive. Reverse repo rate is exactly the opposite of repo

17



rate. It is the rate at which RBI takes the money from the commercial banks, or it is the

rate at which RBI absorbs excess cash from banks. At present (as on 2009-06-24) the

repo rate is 4.75% and reverse repo rate is 3.25%. As part of its Annual Credit Policy,

the Reserve Bank of India (RBI) cut Repo and Reverse Repo Rates by 25 basis points

(0.25%) each on 21st April,2009. After this cut in rates, the Repo Rate now stands at

4.75% which was earlier 5% while the reverse Repo rate stands at 3.25% which was

earlier 3.5%. The bank regulator decided to leave the cash reserve ratio (CRR)

unchanged. So CRR has been left untouched at 5 per cent.

FIXATION OF LENDING RATES:

Lending rates of commercial banks were deregulated since October 1994 subject to the

condition that banks have to declare their Prime Lending Rates (PLRs) for credit limit

over Rs.2 lakh as approved by their Boards. For credit limit up to Rs.2 lakh, PLR (now

Benchmark Prime Lending Rate) remains as the ceiling rate. Since April 2001,

commercial banks were given freedom to lend at sub-BPLR rates (for credit limit of

over Rs.2 lakh) to creditworthy borrowers on the lines of a transparent and objective

policy approved by their Boards.

Interest rates on export credit in rupee terms were rationalised by the Reserve Bank in

the annual monetary and credit policy for 2001-02 by prescribing ceiling rates linked to

the relevant PLRs of banks instead of earlier fixed/ceiling rates. At present, in respect of

pre-shipment credit up to 180 days and post-shipment credit up to 90 days, the ceiling

rate applicable is 2.5 percentage points below the relevant BPLR. In respect of pre-

shipment credit beyond 180 days and up to 270 days and post-shipment credit beyond

90 days and up to 180 days, the ceiling rate was deregulated effective May 1, 2003.

The Reserve Bank, vide paragraphs 59 and 66 of the Monetary and Credit Policy for

2002-03 announced on April 29, 2002, indicated its intention of collecting maximum

and minimum interest rates on advances charged by banks and place the same in the

public domain to enhance transparency. Accordingly, Reserve Bank is receiving actual

lending rates from scheduled commercial banks (excluding RRBs) under Special

18



Quarterly Return VI-AC. While submitting information on the maximum and minimum

interest rates on rupee export credit as well as other credit, banks are advised to ignore

extreme values in the lending rates (up to 5 per cent of advances on either side). Further,

banks are also advised to furnish the range of interest rates in which large value of

business (say, 60 per cent or more) is contracted so that RBI can monitor the general

trend in lending rate charged by banks in India.

While presenting data for individual banks, the BPLR represents the range of PLRs of

banks on various products and tenors. The median range is arrived at separately as the

range of medians of all minimum BPLRs of banks and all maximum BPLRs.

CREDIT SEQUEENZE

Credit Sequeenze is another quantitative method of credit control. It controls the amount

of bank credit at a certain limit and fixing maximum limit for commercial borrowings.

QUALITATIVE TECHNIQUES OR SELECTIVE CREDIT CONTROL (SCC)

The selective or qualitative control methods are not general in nature, but they are aimed

at individual banks and on individual commodities, which bring about price distortion

and create inflationary or deflationary situations. The selective control aims at

improving the quality and behaviour of individual banks and they are more advisory in

character. The qualitative controls distinguish between essential and non essential uses

of bank credit. Their operation effects not only the lenders but also the borrowers, who

are equally responsible for credit expansion. This method has become popular after

world war II. They try to overcome the weaknesses of the traditional controls. They areselective methods because they are applied against selective banks which violates the

directives of RBI and also against selective commodities.

The main objectives of qualitative credit control are:

a) To utilise credit to productive projects from unproductive sectors.

b) To distribute credit to more desirable purposes

19



c) To correct unfavourable balance of payment position of a country by

lowering the discount rate on export bills and preventing imports by

increasing the discount rate.

d) To control the activities of non banking financial institutions which are

working against the interest of the depositors

e) By controlling the marginal requirements, the objective aim at regulating the

conduct of the borrowers

f) To render guidance and advice to member banks relating to market

conditions and international economic situations

g) To provide market news market analysis, market research, statistical

information etc. to member banks and also the price structure of commodities

in the local and international markets. This service is very important in view

of the fact that commercial bank lend advances and provide loans on the

security of go downs and commodities maintaining margins

The various methods of qualitative credit control are as follows:

CREDIT RATIONING

Commercial banks makes loans, advances and provide credit to borrowers on security of

stocks shares and commodities, while doing so they do not provide credit on full amount

of value on security but lend up to 60% or 70% of the value of the commodity and

maintain a margin of 30%to 40% and at times 50%.This is because the value of the

commodities, shares subject to market fluctuations depending on national and

international economic situations. They generally maintain a cushion against a decline in

the value of security .A higher margin reduces the outflow cash and thereby leads to

credit contraction and this is done during inflationary times and opposite will be the case

during depression times. The central bank can issue directions to the commercial banks

relating to the requirements of margins. Credit Rationing is a method is very useful in

20



a planned economy when the resources of the country should be distributed

between different uses. Credit rationing is a tool that is Imposing limits and

charging higher/lower rates of interests in selective sectors being done by RBI.

RBI has been stipulating certain targets for credit distribution to various sectors. For

example, in November 1947,banks were advised that their priority sector lending should

reach a level of not less than one third of their outstanding credit by march

1979.Subsequestly in October 1980,the banks were instructed that their a)priority sector

should advances should constitute 40% of aggregate bank advances by

1985.b)Advances to the agricultural sector should be 40% of the priority sector

advances, or at least 50 % of total direct lending to the agriculture by 1983,d) Advances

to the rural artisans, village crafts men and cottage industries should be 12.5% of the

total advances to small scale industries by 1985.

In order to reach regional and geographical balance in respect of credit disbursal, the

RBI has been asking banks to achieve certain prescribed credit deposit ratio in respect of

their rural and semi urban branches separately. Normally they have been asked to

achieve a credit deposit ratio of 60%in this context.

This method also has some certain limitations. There is an infringement on the

commercial banks freedom to employ funds. It opposes the very concept of lender of

last resorts. This method should not be used frequently. It could be a temporary

instrument in the hands of RBI.

MORAL SUASION

Moral suasion is most active and consistently used teqnique of monetary control. Moral

suasion means persuasion and request made by the central banks to follow strictly the

directives, guidance and instruction relating to monetary policy. The activities in the

form of letters/circulars and holding discussions between RBI and banks about the

trends in the economy in general and in the money, credit and finance in particular.

Further the measures which are ought to be taken periodically in the light of national

objectives. The commercial banks should not make advances and give loans on

21



speculative transaction on any account to protect the interests of depositor’s and

shareholder’s as they are the virtually owners of the banking institutions.

This method refers to more advisory function. More over it will be more efficient and

efficient if it has administrative function or a threat of punitive action. Coming to

effectiveness and efficiency if this technique, it is more an advisory function. In the

absence of a legal action for non-compliance, this method remains ineffective. Due to

nationalization of banks this teqnique has been used actively. In fact Bank of England

practice this method since there is a close cooperation and understanding between

commercial banks and central bank. Only if the commercial banks realize their duties

and responsibilities to strictly observe the monetary disciplines all these circulars

or D.O letters by RBI to commercial banks will have a great positive impact.

DIRECT ACTION METHOD:

Direct action of control is one of the extensively used methods of selective control

which includes other measures of selective credit controls. This method is widely used

by almost all the central banks in the world regulatory to control anti- banking lured by

profit motive. This refers to specifically lending and investment portfolio of

commercial banks. The RBI issued a directive in 1958 to entire banking system to

individual parties refrain from entire lending against certain commodities. When the

central bank finds that the commercial bank has resorted to speculative business and has

indulged in any anti social and anti-national activities, it may adopt a suitable action

against that bank. This action could be penalizing the bank with very heavy penalties,

fines and even cancellations of the license or issue moratorium i.e. temporarysuspension to the bank.

Being a parent monetary organization of the country it collects sufficient information

relating to prices and other statistical information from the national and international

institutions and provide them to the Government and commercial banks for their

efficient operations. A central bank can charge a penal rate of interest on its lending and

22



even refuse further rediscounting facilities till the normalcy is established. When the

RBI finds that particular bank has misdirected the funds due to political or economical

pressures, it can withdraw the facility given to the bank forthwith. Through credit

control and other methods it stabilizes the internal prices and removes distortions in the

economy .

The RBI takes necessary steps to strengthen the capital markets in order to mobilize

sufficient capital for developmental purposes. It finances funds to state and central to

achieve their objectives like price stabilization, wages, production, employment etc.

Through a process of Research and Development, it supplies economic and financial

information to the governments in their pursuits to implement the planning process.

CREDIT AUTHORIZATION SCHEME / PRIOR AUTHORIZATION SCHEME

The teqnique was introduced in November 1965 with a view to regulate the volume and

terms of credit supplied to large borrowers. Under the scheme the commercial banks

required to seek prior authorization of RBI and report later to the RBI with regard

to large credit facilities given to the large private and public sector units. The credit

facility subject to prior authorization includes credit facility regarding Working capital,

term loans for capital accumulation, letter of credit and deferred payment guarantees.

This s method has the following objectives’) To regulate credit to control inflation) To

enforce financial discipline on the large borrowers) To ensure the end use of credit is

genuinely productive purposes and to ensure that credit is supplied in accordance with

the needs of the borrowers and the goals of planning .The measure was applicable to

commercial banks, CO-operative banks, public sector as well as private sector units and

short and long-term loans.

According to the scheme if the fresh working capital limit to be sanctioned to any single

party by anyone bank or the entire banking system exceeded a stipulated level, the bank

would require prior authorization of the central bank for authorization of the loan. The

23



cutoff level subsequently increases two crore, three crore and four crore and six crore in

the years 1975, 1982 and 1983.The cutoff level used to be fixed at higher level for the

public sector units.

This scheme was in operation for more than twenty years, but in the second half of

1988, the RBI decided to withdraw the scheme after a review of its working and

introduced post sanction scrutiny namely Credit monetary arrangement (CMA).If

it was found that any specific bank was not enforcing basic credit discipline, the RBI

could instruct such a bank to refer the cases of large borrowers to itself for prior

authorization. It was a kind of selective credit control. Since July 1987 the credit

authorization scheme has been liberalized for providing greater access to credit to meet

genuine demands in production sectors without the prior sanction of the RBI.

24



ROLE OF RBI’S CREDIT POLICY IN THE REVIVAL AND STABLISATION

OF THE ECONOMY

RBI maintains status quo on rates reiterates painful adjustment ahead:

The current mid-term monetary and credit policy review maintains a status quo on the

policy rates. RBI has demonstrated its intentions by taking policy action as and when

required. The outlook continues to remain uncertain and the lead indicators are not

pointing to any meaningful recovery in the near term. RBI has reiterated the fact that a

period of painful adjustment is definitely ahead of us. Recent policy language hints at

further rate and CRR cuts to happen only if the money market rates are significantly

above the policy LAF corridor. Since the last policy, RBI has cut repo rate by 250bps,

CRR by 150bps and reverse repo rate by 200bps, along with a slew of other measures to

improve liquidity. RBIs policy stance is firm on providing comfortable liquidity

conditions for meeting economic growth and responding swiftly and decisively with all

available policy actions as the external or domestic conditions warrant. With well

anchored inflation expectation, price stability and orderly financial markets. Overall we

believe that the policy review announcements had more to do with re-iterating its stance

and actions already taken. Neutral for the banking sector

Key policy highlights

Bank rate unchanged at 6%. Repo Rate has been kept unchanged at 5.5%, after an

interim cut of 250bps since the last policy. Reverse repo rate has been kept unchanged at

4%, after an interim cut of 100bps since the last policy.CRR has been kept unchanged at

5%, after an interim cut of 150bps since the last policy

.

25



Liquidity support facilities (extended up to September 30, 2009 from

June 30, 2009):

SLR up to 1.5% of their NDTL, for meeting the funding requirements of mutual funds

(MFs), nonbanking financial companies (NBFCs) and housing finance companies

(HFCs). Special refinance facility for SCBs (excluding RRBs) available up to 1.0% of

each bank’s NDTL, as on October 24, 2008.

ICRA Comments on the RBI’s Annual Policy Statement for 2007-08

Highlights of the RBI’s Annual Policy Statement for 2007-08 –

April 2007

• Benchmark rates of Repo Rate, Reverse Repo Rate and Bank Rate kept

unchanged.

• CRR and SLR also unchanged

• GDP growth forecast at around 8.5% for 2007-08

• Inflation to be brought down as close as possible to 5% medium - term range on

inflation at 4.0 -4.5%.

• Ceiling rates on foreign currency deposits reduced

• Risk weights on housing loans below Rs 2 million reduced to 50% from 75% as

a temporary measure

• Risk weights on loans upto Rs 0.1 million backed by gold or silver ornaments

reduced to 50% from 125%.

• Banks and Primary Dealers permitted to transact in single entity credit default

swaps

• Ceiling rate of interest payable by NBFCs (other than RNBCs) on deposits raised

by 150 basis points to 12.50%.

• Steps planned for reducing some of the infrastructure bottlenecks in the Indian

debt markets

26



Key Rates left unchanged but only for time being

The Reserve Bank of India has kept the key rates i.e. Reverse Repo (6%), Repo (7.75%)

and Bank Rate

(6%) unchanged. While the Reverse Repo and Bank Rate have been maintained at the

same level for

some time, the Reverse Repo rates have seen an increase from 7% in October 2006 to

7.75% in March

2007 in three tranches. This was a signal to banks to better manage their liquidity

position and increase low cost deposit base while meeting incremental credit demands.

Post the announcement on March 30, 2007, the cash reserve ratio for scheduled banks

would be 6.50% from fortnight beginning April 28, 2007. We feel that given the stated

short-term objective of the RBI to curtail the inflation, another 25-50 basis points hike in

key rates (especially CRR and or Repo rates) in the short term cannot be ruled out.

Acceptable Inflation band lowered; actual levels remain high

Given the RBI’s stated intent to maintain the inflation in band of 4.0-4.5% (earlier band

- 5.0-5.5%) in themedium term, we feel RBI may have to resort to further rate hikes in the short term if

the steps already

taken do not yield the desired results of systemic liquidity and price stability. The

immediate objective to

rein in the inflation at around 5% (currently at over 6%). At the same time, the RBI

plans to use all tools

available with it to manage adequate liquidity levels to met credit demands while

maintaining price and

financial stability in the system.

Increasing linkages with global economy

27



The Indian economy is more linked to the global economy than ever before. The

happenings in the global financial markets have a more direct impact on the Indian

economy and financial markets with an improving investment climate and a favourable

outlook on India, as far the international investor community is concerned. The same is

also reflected in the annual policy as the RBI has delved substantially on the global

developments. A common feature among the apex banks of most countries seems to be a

close monitoring of the inflation and volatility in asset and currency markets both in the

domestic as well as the global markets and take the monetary policy measures

accordingly.

GDP growth remains robust

GDP growth for 2006-07 is estimated at 9.2% driven by strong performance of the

industrial and services

sector which is offsetting the relative slowdown reported in the agriculture sector. A

favourable and buoyant growth prospects over the medium term, especially for the

industrial and services sector is likely to help India Inc. continue report strong GDP

growth numbers. The GDP growth for 2007-08 is projected at around 8.50%.

Credit off-take buoyant; albeit marginally lower

Credit off-take for the banking system remains robust across all sectors, particularly

retail, services and

select industrial sectors, with the non-food credit reporting a 28% growth in 2006-07

(31.8% in 2005-06).

On the back of robust demand, despite the rise in interest rates in the recent past, credit

is expected to

grow at 24-25% in 2007-08 as well, thereby keeping systemic liquidity under pressure

unless banks are

able to raise commensurate resources.

Deposit growth picks up; but lags credit growth

The deposit growth increased to 23% in 2006-07 (18% in 2005-06; 17% projected in

2007-08) on the back of higher interest rates offered by banks to meet their credit

28



targets. The rise in interest rates also saw funds moving from postal savings into the

banking system. However, the incremental credit-deposit ratio continued to remain high

at 85% for 2006-07 (109% in 2005-06). With credit growth outpacing the growth in

deposit mobilization by banks, the SLR holdings of banks continue to decline and stood

at 28% of NDTL as on March 31, 2007 as compared to 31.4% a year back. However in

absolute terms, the banks’ investments in G-Secs and other a pproved securities grew by

around 10% in 2006-07.

Some respite for select class of borrowers

The risk weights on loans up to Rs 0.1 million backed by gold or silver ornaments has

been reduced to

50% from 125%. At the same time, as a temporary measure, the RBI has also reduced

the risk weights on housing loans below Rs 2 million to 50% from 75%. With a large

proportion of housing loans availed for less than Rs 2 million, banks would benefit by

an improvement in their regulatory capital adequacy levels. We may now see most

banks having a differential interest rate structure based on the loan amounts. As a result

of this measure, we expect a stable or a marginal reduction in lending rates for these

select class of borrowers and continued demand for home loans.

Control non resident deposit flows maintained

With indications that capital inflows are likely to be sustained, adding to potential

inflationary pressures, as well as monetary and liquidity management issues, RBI has

sought to reign in the non-resident deposit products, which have witnessed strong

growth in 2006-07. RBI has reduced the interest rate ceilings on non-resident deposit

products such as FCNR(B) and NR(E)RA. This move could force banks to look at other

avenues for raising resources for on-lending activities as such deposits now become less

attractive for the depositors.

Overseas investment limits increased

In order to counter the deluge of capital inflows, the RBI has been liberalising the norms

for overseas

29



investments by Indian corporate and residents. The ceiling on overseas portfolio

investments by Indian

corporate has been increased to 35% of net worth from 25% while overseas ceiling on

mutual fund

investments have been raised to US$4 billion (from US$3billion). Outward remittance

limits for various

businesses have also been eased. In addition, individuals are now allowed to remit up to

US$100,000 per financial year (as compared to US$50,000 earlier). While these are

enabling clauses, the actual usage of these provisions remains to be seen, as large

proportions of the earlier limits still remain unutilised.

Some reprieve for deposit taking NBFCs

RBI has increased the ceiling rate on interest payable by NBFCs (other than RNBCs) on

deposits mobilized by 150 basis points to 12.50%. This should help these NBFC to

mobilise deposits as they can now offer competitive rates compared to banks, which

have raised the deposit rates sharply in the last few months.

Repo with corporate bonds to be available soon

The RBI continues with its measures to improve the infrastructure for development of

the debt markets in the country. The focus this time around has been on corporate bonds

and introduce new products for the debt market participants. RBI is open to include

corporate bonds in the repo market after the trading platforms (for corporate bonds)

stabilise and robust clearing and settlement systems (Delivery versus Payment system)

are established. This is likely to provide fillip to the secondary debt markets for

corporate bonds and also improve the liquidity profile of banks as they can use corporate

bonds for repo transactions. The proposed new trading platform for interest rate swaps is

likely to improve the liquidity in the derivative markets.

Credit Default Swaps introduced in a limited way

The RBI has accepted another of the markets’ demand – a credit default swap product.

To begin with only banks and PDs would be allowed to transact in single-entity credit

30



default swaps. The detailed guidelines that are to be released by May 15, 2007 would

provide greater insight into the nuances of this product as proposed for the Indian

markets.

Steps being taken to reduce infrastructure bottlenecks

The RBI continues to lay emphasis on improving the infrastructure bottlenecks that

remain in the Indian

financial markets. The focus is on leveraging IT systems. While several initiatives have

been taken in the

past, the next few months is likely to see some more time bound action plans, which will

improve the

efficiencies of the Indian banking system.

Overall Comment

In this policy, while no benchmark rates have been changed, the RBI continues to focus

on issues relatingto liquidity and inflation. ICRA feels that another round of rate hikes islikely in case the inflation and the liquidity parameters do not fall within the RBI

comfort zone. That apart, the RBI has taken some more steps towards deepening the

Indian debt markets and improving the systemic infrastructure. The next few months is

likely to witness RBI issuing draft / final guidelines on various important matters such

as Basel II, currency and interest rate futures, credit derivatives, mortgage guarantee

companies, widening the Repo markets and improvement in the settlements and

payments mechanism etc.

Credit polices taken by RBI in the 2009 – 10 policy

Credit Delivery Mechanism and Other Banking Services

a) Credit Flow to the MSE Sector

31



As indicated in the Mid-Term Review of October 2008, the Reserve Bank appointed a

Working Group on Rehabilitation of Sick SMEs (Chairman: Dr. K.C. Chakrabarty). The

Working Group made several significant recommendations pertaining not only to the

issue of rehabilitation of sick SMEs but also to the larger issues of credit flow to the

SME sector and other developmental issues. While the recommendations on which

action is to be initiated by the Government of India, State Governments and SIDBI are

being forwarded to them, it is proposed:

• to issue guidelines to banks based on the recommendations of the Group, by April 30,

2009.

Having regard to the need to accelerate the credit flow to the micro and small

enterprises (MSEs) sector so critical for employment, output and exports, it is proposed:

• to ask the Standing Advisory Committee on MSEs to review the Credit Guarantee

Scheme so as to make it more effective.

(b) Rural Co-operative Banks

(i) Licensing of Co-operatives

The Committee on Financial Sector Assessment (Chairman: Dr. Rakesh Mohan and

Co-Chairman: Shri Ashok Chawla) has observed that there is a need to draw up a

roadmap for ensuring that only licensed banks operate in the co-operative space. The

Committee further suggested the need for a roadmap to ensure that banks which fail to

obtain a licence by 2012 should not be allowed to operate. This will expedite the process

of consolidation and weeding out of non-viable entities from the co-operative space.

Accordingly, it is proposed:

• to work out a roadmap for achieving this objective in a non-disruptive manner in

consultation with NABARD.

32



(ii) Revival of Rural Co-operative Credit Structure: Status

As indicated in the Annual Policy Statement of April 2008, the Government of India

approved a package for revival of the short term rural co-operative credit structure based

on the recommendations of the Task Force on Revival of Rural Co-operative Credit

Institutions (Chairman: Prof. A. Vaidyanathan). So far, 25 States have executed

Memoranda of Understanding (MoUs) with the Government of India and the NABARD,

as envisaged in the package. Eight States have made necessary amendments in their Co-

operative Societies Acts. An aggregate amount of Rs. 4,740 crore has been released by

the NABARD as the Government of India’s share for recapitalisation of primary

agricultural credit societies (PACS) in eight States as on February 28, 2009. Eight State

Governments have released their shares of Rs.459 crore for recapitalisation of PACS.

The National Implementing and Monitoring Committee (NIMC), set up by the

Government of India, is guiding and monitoring the implementation of the revival

package on an all-India basis.

(c) Regional Rural Banks

(i) Capital to Risk-weighted Assets Ratio for RRBs

The Committee on Financial Sector Assessment (Chairman: Dr. Rakesh Mohan and

Co-Chairman: Shri Ashok Chawla) has suggested a phased introduction of capital to

risk-weighted assets ratio (CRAR) in the case of RRBs, along with the recapitalisation

of RRBs after consolidation of these entities. It is, therefore, proposed:

• to introduce CRAR for RRBs in a phased manner, taking into account the status of

recapitalisation and amalgamation. A time-table for this purpose would be announced in

consultation with NABARD.

33



(ii) Assistance to RRBs for Adoption of ICT Solutions for Financial Inclusion: Status

The Report of the Working Group on Defraying Costs of ICT Solutions for Regional

Rural Banks (Chairman: Shri G. Padmanabhan) was placed on the Reserve Bank’s

website in August 2008 for comments from public. The Group has, inter alia, noted that

apart from the North-Eastern region and Jammu and Kashmir, there are 204 districts in

several States which have been identified by the Committee on Financial Inclusion

(Chairman: Dr. C. Rangarajan) as areas where there is a high level of financial

exclusion. It is, therefore, suggested that these areas could also be considered for special

treatment. With a view to enabling RRBs to adopt IT based solutions for financial

inclusion, it is proposed:

• to work out, in consultation with NABARD, the manner of providing assistance to

RRBs adopting ICT solutions for financial inclusion in districts identified as having high

level of exclusion by the Committee on Financial Inclusion.

(iii) Amalgamation of RRBs

Consequent upon the amalgamation of 156 RRBs into 45 new RRBs sponsored by 20

banks in 17 States, the total number of RRBs declined from 196 to 86 as at end-March

2009 (which includes a new RRB set up in the Union Territory of Puducherry). The

amalgamation process is almost complete.

(iv) Recapitalization of RRBs

The Union Budget 2007-08 announced that RRBs, which have a negative net worth,

would be recapitalised in a phased manner. As on March 31, 2009, 26 RRBs have been

fully recapitalised with an amount of Rs. 1,783 crore and one RRB has been partially

recapitalised with an amount of Rs.13 crore. The process of recapitalisation has been

completed except in respect of one RRB in the State of Uttar Pradesh.

34



(v) Scheduling of Amalgamated RRBs

Out of 45 amalgamated RRBs, 25 RRBs have been included in the Second Schedule to

the RBI Act, 1934 while 76 erstwhile RRBs have been excluded from the Second

Schedule in terms of the notification dated September 22, 2008 published in the Gazette

of India dated November 15, 2008.

(vi) Branch Licensing: Further Liberalisation

The Mid-Term Review of October 2008 proposed to allow RRBs greater flexibility in

opening new branches as long as they made profits and their financials improved. The

RRBs have obtained 345 licenses for opening branches in the financial year 2008-09

and have opened 316 branches in the same period.

(vii) Technology Upgradation of RRBs

As indicated in the Mid-Term Review of October 2008, the recommendation of the

Working Group (Chairman: Shri G. Srinivasan) to prepare a roadmap for migration to

core banking solutions (CBS) by RRBs, was forwarded to all sponsor banks in October

2008 for implementation. The Report has, among others, set September 2011 as the

target date for all RRBs to move towards CBS. Also, all RRB branches opened after September 2009 are required to be CBS compliant from day one. In March 2009,

sponsor banks were advised to give their feedback/status on implementation of the

recommendations of the report in respect of RRBs sponsored by them.

(d) Delivery of Credit to Agriculture and other Segments of the Priority Sector

35



(i) Kisan Credit Card Scheme

The Kisan Credit Card (KCC) scheme, introduced in 1998-99 to enable farmers to

purchase agricultural inputs and draw cash for their production needs, was revised to

provide adequate and timely finance for meeting the comprehensive credit requirements

of farmers under a single window, with flexible and simplified procedure, adopting a

whole farm approach. During 2008-09 (up to December 2008), public sector banks

(PSBs) issued 3.9 million KCCs with sanctioned limits aggregating Rs.23,366 crore.

Since the inception of the scheme, PSBs have issued 35.08 million KCCs with

sanctioned limits aggregating Rs.1,77,607 crore.

(ii) Rural Infrastructure Development Fund

The Interim Budget 2009-10 announced the continuation of financing of rural

infrastructure projects for 2009-10 by way of RIDF XV which would be set up with

NABARD with a corpus of Rs.14,000 crore, and a separate window under RIDF XV for

rural roads component of Bharat Nirman Programme with a corpus of Rs.4,000 crore.

Consequent upon the announcement made in the Union Budget 2008-09, several funds

were set up such as: (i) Short-Term Co-operative Rural Credit (STCRC) (Refinance)

Fund with the NABARD with a corpus of Rs.5,000 crore; (ii) MSME (Refinance) Fund

and MSME (Risk Capital) Fund with the Small Industries Development Bank of India

(SIDBI) with corpus of Rs.1,600 crore and Rs.1,000 crore; and (iii) Rural Housing Fund

with the National Housing Bank (NHB) with corpus of Rs.1,000 crore. The Annual

Policy Statement of April 2008 announced that the shortfall in achievement of 10 per

cent sub-target for lending to weaker sections by domestic scheduled commercial banks

will also be taken into account for the purpose of allocating amounts for contribution to

the Rural Infrastructure Development Fund (RIDF) maintained with the NABARD or

funds with other financial institutions, as specified by the Reserve Bank, with effect

from April 2009.

Consequent upon the announcement of measures by the Reserve Bank on November

15, 2008 to sustain the growth momentum in the employment-intensive sectors of micro

36



and small enterprises and housing, the corpus of MSME (Refinance) Fund and Rural

Housing Fund was enhanced by Rs.2,000 crore (to Rs.3,600 crore) and by Rs.1,000

crore (to Rs.2,000 crore) respectively. As on March 31, 2009 various scheduled

commercial banks have placed deposits of Rs.4,622 crore in STCRC (Refinance) Fund,

Rs.3,326 crore in MSME (Refinance) Fund, Rs.250 crore in MSME (Risk Capital) Fund

and Rs.1,760 crore in Rural Housing Fund.

(e) Interest Subvention Relief to Farmers

The Union Budget 2008-09 announced continuation of the interest subvention scheme

for short-term crop loans, introduced in 2006-07. The rate of subvention was increased

from 2 per cent to 3 per cent for 2008-09. The Interim Budget 2009-10 announced that

the Government of India would also continue to provide interest subvention in 2009-10

to ensure that farmers get short-term crop loans up to Rs.3 lakh at 7.0 per cent per

annum.

(f) Micro-finance

The self-help group (SHG)-bank linkage programme has emerged as the major micro-

finance programme in the country and is being implemented by commercial banks,

RRBs and co-operative banks. As on March 31, 2008 3.6 million SHGs had outstanding

bank loans of Rs.17,000 crore, an increase of 25 per cent over March 31, 2007 in respect

of number of SHGs credit linked. During 2007-08, banks financed 1.2 million SHGs for

37



Rs.8,849 crore. As at end-March 2008, SHGs had 5 million savings accounts with banks

for Rs.3,785 crore.

(g) Financial Inclusion

So far, 344 districts have been identified by SLBCs for 100 per cent financial inclusion.

Of these, 175 districts in 21 States and 7 Union Territories have reported having

achieved the target. All districts of Haryana, Himachal Pradesh, Karnataka, Kerala,

Uttarakhand, Goa, Chandigarh, Puducherry, Daman & Diu, Dadra & Nagar Haveli and

Lakshadweep have reported having achieved the target of 100 per cent financial

inclusion.

As indicated in the Mid-Term Review of October 2008, the findings of the external

agencies entrusted with conducting evaluation studies in achieving the target of 100 per

cent financial inclusion in 26 districts were placed on the Reserve Bank’s website for

wider dissemination. Based on the findings, banks were advised in January 2009, among

other things, to (i) ensure provision of banking services nearer to the location of the no-frills account holders through a variety of channels; (ii) provide General Credit Card

(GCC)/small overdrafts along with no-frills accounts to encourage the account holders

to actively operate the accounts; (iii) conduct awareness drives so that the no-frills

account holders were made aware of the facilities offered; (iv) review the extent of

coverage in districts declared as 100 per cent financially included; and (v) efficiently

leverage on the technology enabled financial inclusion solutions currently available.

(ii) Special Task Force in North-Eastern Region

As indicated in the Mid-Term Review of October 2008, a scheme of providing financial

support to banks by the Reserve Bank for setting up banking facilities (currency chests,

extension of foreign exchange and Government business facilities) at centres, in the

North-Eastern region (NER), which are not found to be commercially viable by banks,

38



was formulated, provided the State Governments made available necessary premises and

other infrastructural support. The Government of Meghalaya has agreed to the proposal

of providing premises and security, and bids have been received by PSBs and RRBs for

setting up branches at centres identified by the State Government and are being

processed. Action is being intitiated in respect of other States in NER where requests

have been received.

(iii) Setting up of Credit Counselling Centres on a Pilot Basis

So far, banks have reported setting up or proposing to set up 123 credit counselling

centres in various States of the country. The feedback received in this regard indicated

that most of these centres were in effect set up as extensions of the bank branches and

engaged in promotion of bank specific products. Accordingly, a model scheme on

financial literacy and credit counselling centres (FLCCs) was formulated and

communicated to all scheduled commercial banks and RRBs with the advice to set up

the centres as distinct entities maintaining an arm’s length from the bank so that the

FLCC’s services are available to even other banks’ customers in the district.

(iv) Setting up of Rural Self Employment Training Institutes

The Reserve Bank has issued guidelines, framed by the Government of India, to the

SLBC convenor banks to set up at least one Rural Self Employment Training Institute

(RSETI) in each district by 2010. These institutions will train at least one youth in a

family below poverty line (BPL) in various fields and enhance capacity building. In all,

134 RSETIs have been set up as on December 31, 2008. A target for opening of 100

RSETIs by banks was set for the year 2008-09 and a grant of Rs. one crore per RSETI

has been earmarked by the Planning Commission for setting up the institutes. The

Regional Offices of the Reserve Bank have been advised to monitor the progress of

setting up of RSETIs under their jurisdiction on a quarterly basis.

39



(h) High Level Committee on Lead Bank Scheme

As announced in the Mid-Term Review of the Annual Policy Statement for the year

2007-08, a High Level Committee (Chairperson: Smt. Usha Thorat) with members

drawn from various financial institutions, banks and Chief Secretaries of select States

was constituted to review the Lead Bank Scheme. The Committee had several rounds of

discussions with different State Governments, banks and other stakeholders, including

academicians, micro-finance institutions (MFIs) and non-governmental organisations

(NGOs). The Committee’s draft report will be placed on the Reserve Bank’s website by

May 15, 2009.

(i) Amendment to Banking Ombudsman Scheme 2006

The scope of the Banking Ombudsman Scheme, 2006 was widened to include, inter

alia, deficiencies arising out of internet banking. Under the amended Scheme, customers

can lodge complaints against banks for non-adherence to the provisions of the fair

practices code for lenders or the code of bank’s commitment to customers issued by theBanking Codes and Standards Board of India (BCSBI).

40



Conclusion

In India, the unusual methods of credit control are not operative in an effective manner.

The main reason for the ineffectiveness of the monetary policy of the RBI is two main

conditions essential for the success of the credit policy are the dependence of the money

market upon commercial banks and dependence of the commercial banks on RBI for

their funds. Both these conditions have been only partially fulfilled in India. That is

why, the credit control policy measures of RBI have not been totally effective in India.

Not only that , in recent times unaccounted money(black money) has been used for

financing speculative dealings.

Overall, the RBI measure seems to be well balanced and timely in terms of taking

appropriate steps to fight inflation and maintain orderly growth at the same time. The

Credit policy is likely to have an adverse rate on interest rates. Liquidity is tight and is

expected to remain tight till March 2007, at the least. With the repo rate of 7.50% actingas the floor for interest rates, and the heavy borrowing likely to emerge from the

corporate and banking sectors, corporate interest rates look all set to go up this quarter.

The corporate spreads are ruling at high absolute levels from a historical perspective and

appear to provide attractive investment opportunities. Given the growth in bank

deposits, incremental SLR demand from the banking sector is likely to keep

Government yields from going up. While corporate rates have been steadily rising,

Government yields have been range-bound on back of requirement from the banking

and insurance sectors as well as provident funds. Going forward, domestic interest rates

will take cues from developments on variables like commodity prices especially crude

oil, global yields and Central bank actions and domestic inflation numbers and liquidity

conditions.

41



Reference:

Public Finance by J K Mehta, Narayan B.N

Financial Markets and Systems by L.M BHOLE

http://www.citeman.com/3556-credit-control-methods/

http://www.majorgainz.com/newecosp/CP270109-PL.pdf





fms final project

Documents