RBI may devise ways to ensure credit flow to SMEs

RUN-UP TO THE CREDIT POLICY

The Reserve Bank of India (RBI) governor Y Venugopal Reddy is expected to focus on the structural issues and qualitative aspects of the banking industry when he unveils the annual policy on Tuesday.

For instance, the RBI may prescribe a formula for capital charge on market risk to ward off the impact of any hike in interest rates on banks' investment portfolio.

Right now, banks are required to create an investment fluctuation reserve (IFR) to the extent of five per cent of their investment portfolio over a period of five years to create a cushion to absorb any interest rate shock.

However, bankers say this is not a foolproof method as the IFR does not take into account the maturity profile of a bank's investment portfolio.

New private and foreign banks are tilted towards short-term papers while public sector banks traditionally have long term papers in the their investment portfolios. Hence, a uniform IFC norm does not work for the industry.

So far, investment in government securities is virtually risk free. If the RBI directs banks to create capital charge for market risk, this will force banks to push credit and lend to small and medium industry segment.

In other words, this will indirectly pave the path for better credit flow to all industrial segments. RBI may also fine-tune the spread on banks' benchmark prime lending rate (BPLR) to ensure that small and medium industries get the benefit of low interest rates.

So long, banks are required to announce a spread over their BPLR. The RBI may direct banks to a announce the maxim spread between the strongest borrower and the weakest borrower.

Following this, if a bank announces a 4 per cent spread, this will mean if a AAA-rated borrower get credit at 7 per cent, the bank cannot charge more than 11 per cent to its weakest borrower. However, personal loans are likely to be kept out of this formula.

On the macro economic parameters, the RBI may project a GDP growth of around 6.5 per cent with an upward bias for fiscal 2004-05. The inflation rate projection could be around 5 per cent. Last year it was 4-4.5 per cent but the actual rate of inflation was higher by the year end.