Highlights of Credit Policy

FY06 GDP growth seen at 7%, inflation seen in 5-5.5% band.

Monetary Measures

· Bank Rate kept unchanged at 6%

· Reverse Repo Rate increased by 25bps to 5%.

· Cash Reserve Ratio kept unchanged at 5%.

Domestic Developments

· During 2005-06, real GDP growth projected at around 7%, inflation rate in a range of 5.0-5.5% and M3 at 14.5%

· GDP growth for 2004-05 placed at 6.9%.

· Inflation rate stood at 5% as at end-March 2005.

· Money supply (M3) increased by 12.8%.

· RBI's foreign currency assets increased by Rs 1,15,044 crore. The expansionary impact of foreign currency assets was neutralised to a large extent by substantial recourse to the MSS in conjunction with reverse repo operations under LAF.

· Non-food credit increased by 26.5%. Total flow of funds from SCBs increased by 23.6% exceeding the growth of 19% anticipated in October 2004.

· Combined market borrowings of the Centre and States were lower.

· During 2004-05, financial markets remained generally stable. While interest rates in money and government securities markets rose intra-year, they stabilised in the later part of the year, albeit at higher levels.

· While the share of sub-PLR lending rose, lending rates remained stable.

· Combined daily transactions of market repo and CBLO was higher than those in the uncollateralised call/notice money market.

External Developments

· Exports in US dollar terms increased by 27.1% while Imports by 36.4% leading to widening of trade deficit to US $ 23.8 billion during 2004-05 (upto February).

· During 2004-05 (April-December), current account showed a deficit of $7.4 billion as against a surplus of $ 4.8 billion in the corresponding period of the previous year.

· Net accretion to foreign exchange reserves, including valuation changes, amounted to US $ 18.2 billion during April-December 2004.

· Indian foreign exchange market witnessed orderly condition with rupee exhibiting two-way movements.

Global Developments

· Though world economy is projected to slow to 4.3% in 2005, expansion is above trend.

· Oil price appears to have larger permanent component.

· Risk to growth arises from current account and fiscal imbalances necessitating exchange rate adjustment.

· The global financial system is stable but risks have increased.

Stance of Monetary Policy

· Overall stance of monetary policy for the year 2005-06 will continue to be as set out in the mid-term Review of October 2004 which includes: (i) Provision of appropriate liquidity to meet credit growth and support investment and export demand in the economy while placing equal emphasis on price stability, (ii) consistent with the above, to pursue an interest rate environment that is conducive to macroeconomic and price stability, and maintaining the momentum of growth, and (iii) to consider measures in a calibrated manner, in response to evolving circumstances with a view to stabilising inflationary expectations.

Developmental and Regulatory Policies

· Status quo on the administered interest rates on (i) savings deposit accounts,

(ii) non-resident Indian (NRI) deposits, (iii) small loans up to Rs.2 lakh and (iv) export credit.

· Effective June 11, 2005, non-bank participants would be allowed to lend up to 10% of their average daily lending in call/notice money market during 2000-01.

· Effective August 6, 2005, non-bank participants would be completely phased out from the call/notice money market.

· Effective April 30, 2005, the benchmark for fixing prudential limits on exposures to call/notice money market in the case of scheduled commercial banks would be linked to their capital funds (sum of Tier I and Tier II capital).

· From April 30, 2005, all NDS members are required to report their term money deals on NDS platform.

· A screen-based negotiated quote-driven system for all dealings in call/notice and term money market transactions is proposed.

· An electronic trading platform for conduct of market repo operations in government securities, in addition to the existing voice based system to be facilitated.

· Participation in market repo facility in government securities for nonscheduled urban co-operative banks (UCBs) and listed companies having gilt accounts with scheduled commercial banks will be allowed subject to eligibility criteria and safeguards.

· The minimum maturity period of certificates of deposit (CDs) reduced from 15 days to 7 days with immediate effect.

· Consolidation of debt and building up of large liquid securities in consultation with the Government while continuing the programme of reissuances.

· Post-FRBM, functional separation between debt management and monetary operations within RBI. For this purpose, RBI will have discussions with market players on the modalities and procedures of market operations.

· The settlement system for transactions in government securities will be standardised to T+1 basis.

· The Reserve Bank would continue to resort to multiple and uniform price methods flexibly in the auction of government securities.

· Expansion of PD business structure to include banks which fulfil certain minimum criteria subject to safeguards and in consultation with banks, PDs and the Government.

· To permit sale of government securities allotted in primary issues with and between CSGL account holders also on the same day.

· Following the recommendation of the Twelfth Finance Commission, RBI would facilitate the smooth transition of States' market borrowing through consultation with the Central and the state governments.

· Cancellation and rebooking of all eligible forward contracts booked by residents, irrespective of tenor, to be allowed.

· Banks to be allowed to approve proposals for commodity hedging in international exchanges from their corporate customers.

· The closing time for inter-bank foreign exchange market in India to be extended by one hour up to 5.00 p.m.

· To raise the ceiling of overseas investment by Indian entities in overseas joint ventures and/or wholly owned subsidiaries from 100% to 200% of their net worth under the automatic route.

· To accord general permission to ADs to open foreign currency accounts of the project offices set up in India by foreign companies and operate the accounts flexibly.

· RBI has set up an Expert Group to formulate strategy for increasing investment in agriculture.

· It is proposed to conduct a survey to assess customer satisfaction on credit delivery in rural areas by banks with the help of an outside agency.

· It is proposed to increase the limit on loans to farmers through the produce marketing scheme from Rs.5 lakh to Rs.10 lakh under priority sector lending.

· Banks are urged to continue their efforts to step up credit to agriculture.

· The Reserve Bank has enabled NGOs to access ECBs up to US $ 5 million during a financial year for permitted end-use, under automatic route.

· As a follow-up of the Budget proposals, modalities for allowing banks to adopt the agency model for providing credit support to rural and farm sectors and appointment of MFIs as banking correspondents are being worked out.

· CIBIL is working out a solution that would provide comprehensive credit reports on SSIs.

· The Reserve Bank is reviewing all its existing guidelines on financing small scale sector, debt restructuring, nursing of sick units, etc., with a view to rationalising, consolidating and liberalising them. Banks are urged to take the revised guidelines as indicative minimum requirement and the Boards of the banks are expected to formulate more liberal scheme as appropriate.

· Under a scheme to be drawn up by the RBI, banks will be encouraged to establish mechanisms between their branches and branches of SIDBI which are located in 50 clusters that have been identified by the Ministry of Small Scale Industries, Government of India for enhancing credit to small industries.

· The Reserve Bank will explore modalities to meet the growing financial needs of medium enterprises.

· RBI is in the process of reviewing the performance of RRBs and exploring restructuring of RRBs.

· Issues regarding priority sector lending need to be debated and examined in depth.

· To issue guidelines on merger and amalgamation between private sector banks and with NBFCs. The principles underlying these guidelines would also be applicable as appropriate to public sector banks, subject to relevant legislation.

· Half-yearly discussion with the CEO of the financial conglomerate convened by the lead regulator with other regulators.

· Banks are urged to refocus on deposit mobilisation and empower the depositors, by providing wider access and better quality of banking services.

· RBI will persist with its efforts to ensure quality of banking services, in particular, to small individual depositors.

· RBI will implement policies to encourage banks which provide extensive services while disincentivising those which are not responsive to the banking needs of the community, including the underprivileged.

· The nature, scope and cost of services will be monitored to assess whether there is any denial, implicit or explicit, of basic banking services to the common person.

· Banks are urged to review their existing practices to align them with the objective of financial inclusion.

· To set up an independent Banking Codes and Standards Board of India on the model of the mechanism in the UK in order to ensure that comprehensive code of conduct for fair treatment of customers are evolved and adhered to.

· To issue appropriate guidelines to banks to ensure transparency and disclosure of information by the card issuing banks and customer rights protection including facilitating enforcement of such rights.

· To widen the scope of the Banking Ombudsman inter alia to cover all individual cases/grievances relating to non-adherence to the fair practices code evolved by IBA and adopted by individual banks.

· In order to maintain consistency and harmony with international standards, banks advised to adopt Standardised Approach for credit risk and Basic Indicator Approach for operational risk with effect from March 31, 2007. The Reserve Bank may consider allowing some banks to migrate to Internal Rating Based (IRB) approach after developing adequate skills both in banks and at supervisory levels.

· The Reserve Bank would enter into bank-wise dialogues relating to ownership and governance in private banks to ensure a time-bound framework for compliance.

· On the basis of the feedback, the draft guidelines on securitisation of standard assets would be finalised.

· The guidelines on sale/purchase of non-performing assets would be finalised on the basis of feedback.

· Draft circular on CDR is being put in the public domain for wider dissemination before taking final decisions.

· The Report of the Working Group on Conflicts of Interest in the Indian Financial Services Sector (Chairman: Shri D.M. Satwalekar) would be put in the public domain for wider dissemination before recommending for adoption.

· The Vision Document for Payment and Settlement Systems indicating action points would be placed in the public domain for wider dissemination.

· A Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) was constituted as a Committee of the Central Board of RBI as notified in the Gazette of India on February 18, 2005

· The Reserve Bank proposes to operationalise National Electronic Funds Transfer (NEFT) System and NEFT (Extended).

· Banks are encouraged to make increasing use of SFMS which is PKI-enabled for inter/intra bank transactions.

· In order to facilitate the technology plans of the financial sector, RBI is preparing a Financial Sector Technology Vision Document which would be put in the public domain.

· A medium-term framework for UCBs up to 2010 would be placed in the public domain for wider dissemination and for implementation as appropriate.

· RBI has begun a consultative process involving officials of the concerned state governments and banks for revitalising and rehabilitating the weak scheduled UCBs.

· RBI is examining the issue of smooth flow of bank finance to NBFCs. · The Standing Committee on Procedures and Performance Audit on Public Services (Chairman: Shri S.S. Tarapore) constituted by RBI has ceased its operations in March 2005. In order to facilitate regular monitoring, Ad hoc Committees in banks have been converted to permanent Standing Committees on Customer Service.

· First Quarter Review of Part I to be undertaken on July 26, 2005.