G V Nageswara Rao: Bonds access welcome

RBI ANNUAL POLICY 2004-05/ GUEST COLUMNS

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G V Nageswara Rao
Managing Director
IDBI Bank

If there is a message from the governor in the monetary policy it seems to be that financial sector reforms and monetary policy measures being pursued thus far by the Reserve Bank continue in the same direction.

There are indeed some key pronouncements that will affect banks. The announcement to allow banks access to long-term funds by issue of bonds is a progressive measure. The deposit profile of banks by its very nature has been short-term while most of their investments and a considerable portion of their advances are long-term, thereby exposing them to risks of asset-liability mismatch.

Allowing banks access to bond markets will enable them to correct the mismatches. But the policy, however, restricts issuance of bonds only to the extent of infrastructure lending. Home loans, which form a significant portion of banks' portfolios today and are mostly of long-duration, are not included in definition of infrastructure lending. We need to move to a system where boards of banks have the freedom to determine their sources of funding based on their asset-liability management strategy.

The RBI governor has also signaled the move towards adoption of Basel-II standards for capital adequacy. A time-table has already been announced for maintaining capital charge for market risk. It is sure to raise capital requirements of most banks. Banks will also need to implement sophisticated risk management systems for credit, market, liquidity and operational risks.

A lot of management attention in the next couple of years will need to be focused on Basel-II which is sure to have considerable impact on banks' working. Ability to raise capital will become important to growth of the banking industry in general and to individual banks in particular.

Allowing securitisation of agricultural loans is another important measure. It will allow banks to specialise in origination of such loans. Public sector banks which have large networks of branches in rural areas are well-positioned to originate agricultural loans which can then be rated and securitised.

Development of a vibrant market in securitised agricultural loans will no doubt considerably enhance credit flow to the agricultural sector.