'Reform money mkt to boost private sector'

A Moody's report says India's industrial capex will touch $200 bn in next 5 years.

India needs to reform its financial market to expand the sources and availability of credit to meet the rising demand from the private sector, according to global rating agency Moody's Investors Service.

"Industrial capital expenditure over the next five years is expected to touch $200 billion. Another $300 billion will be required during the 11th Five-Year Plan (2006-2011) to fund infrastructural improvements, necessary to maintain current pace of economic growth," the agency said.

The domestic banking system was still the major credit provider, both to the government and to the private sector.

However, local banks would be unable to meet future demand fully, at least without considerable changes to the banking system, a joint report by Moody's and its Indian associate ICRA Ltd said.

"Notwithstanding current concerns about excessive credit growth, economic overheating and inflationary pressures, maintaining a high rate of economic growth over a long term may require further financial market reforms to expand the sources and availability of credit," the report said.

A consequence of India's accelerating economic development was its rising demand for credit. Indian companies were expanding domestically and abroad, and a large and growing middle class was showing greater willingness to utilise credit to purchase retail goods, the report revealed.

Moody's said the government was considering exempting long-term infrastructure bonds from withholding tax and statutory pre-emption "" cash reserve ratio (CRR) and statutory liquidity ratio (SLR) "" requirements when local financial institutions raised such funds.

It was also looking at raising single-borrower credit limits for banks to allow them to lend to very large power projects, though such an approach could raise significant systemic issues, the report said.

"An alternative would be to prioritise the deepening and broadening of the private sector's access to capital, including debt funding. Whilst certain reforms may prove difficult to implement, failure could effectively lead to indirect rationing of credit; at least to sectors considered as lower priority, such as retail or property," the report cautioned.

To increase liquidity in credit markets, Moody's has suggested relaxing of guidelines on foreign currency borrowing, easing investment restrictions on pension funds and insurance companies to allow greater investments in non-government securities, increasing the capacity of banks to lend, and activating the moribund domestic corporate bond market.