IFR, voting rights in focus

MONETARY POLICY PREVIEW

P H Ravikumar
MD & CEO
NCDEX Ltd

I would expect nothing really material from the Reserve Bank of India (RBI) governor Yaga Venugopal Reddy's second monetary policy announcement.

This is because it will take some time for the new government to find focus, crystallise the policy postures etc.

Since there is a distinct possibility of the Leftists and Samajwadi Party being a part of the government, and given the mayhem in stock markets on Friday on purported statements that there would be no divestment of profit making public sector undertakings, it is most important that the policy pronouncements assimilate the changed contours.

The few areas that they would have looked at would include areas like investment fluctuation reserves (IFR), voting rights in the banks, extent of foreign ownership in domestic banks by foreign banks operating in India, risk weights for lending to agriculture, lending to sensitive sectors and future approaches to Basle II accord and loan loss provisioning.

I would expect the RBI to give IFR a Tier I capital status. As far as voting rights in excess of 10 per cent in domestic banks and foreign ownership of Indian banks are concerned, the RBI, at best, would say that they are examining the implications of any change.

In regard to ownership of Indian Bank, I don't believe Mint Road should change the rules of the game, particularly when some market transactions have taken place and are under implementation.

All such changes to be fair should be if t all prospective. In regard to Basle II accord implications, I would have expected RBI to push Indian Banks, particularly those which have large overseas operations, to build strong internal risk rating structures.

Probably, a time frame would be suggested for this purpose.

Similarly, instead of a straight-jacket loan loss provision structure, which is a decade old and has served Indian banking system well, banks would now need to move to a case by case approach to provisioning, having regard to factual realities.

In the era of risk weightage to assets, there is a case to look at lower risk weightage for loan assets to mandated sectors, particularly agriculture.

The avowed policy of the new government order is for improvements in agriculture; lower risk weights to this sectoral lending will improve returns on capital and should hence canalise more funds to agriculture.

The global financial markets have witnessed dominance by commodities sector during the last one and half years.

Currently RBI regulations do not permit lending against gold in primary form. I believe this is a 1968 provision.

Nor does RBI allow banks to become members of commodity exchanges and trade on them.

In fact, if benefits of commodity exchanges have to percolate to farmers,(farmers selling forward their crop forward at the point of sowing itself), banks are ideally positioned to play the role of aggregators since individual farmer cannot trade on an exchange.

Given the immense changes that have taken place in the commodity sector, I believe the RBI will review its approach to allowing banks particularly to this very large and important segment of financial sector in India.