Par for the course

RBI ANNUAL POLICY 2004-05

In more ways than one, the RBI's "Annual Policy" was a statement in the dark.

The Indian central bank had no figure - in the absence of a formal Budget - on the central government's annual market borrowing which the RBI manages as the government's merchant banker. No political statement was on the table either as the new government is yet to take over at the Centre.

Under these circumstances, the Reserve Bank of India (RBI) followed an expected line: it played safe and refrained from making any commitment on any front.

When the nature of the fiscal deficit is uncertain, no monetary policy document can be dramatic in content. At best, it could be only a statement of continuity.

After all, the central bank can always change tack as and when the situation demands and it does not need any policy document to do so.

The three-part, 66-page document emphasises the resilience of the Indian economy and harps on the stability factor.

Along with the uncertainties on the external front like rising global rates and the geo-political flux, the statement has also subtly factored in the risk of a new political regime at the Centre which could slow down reforms and bring back the subsidy Raj.

The net result of this is a statement which is rather long in size but short on measures. Most of the measures announced are incremental in nature and they will only nudge the banking sector along the existing trajectory, not shake it.

But amidst all this, the most striking aspect of the policy is the RBI's new-found respect for the banking sector. It has admitted that Indian banks have indeed come a long way and they are mature enough to deserve freedom from micro management.

So, the RBI has lifted the cap on their exposure to unsecured advances and guarantees. Now boards of banks will formulate their policy on the extent to which an individual bank can have exposure in these kind of advances.

Similarly, banks have also been given freedom vis-a-vis their exposure to individual borrowers or a corporate group. So far, the exposure of a bank to a company was capped at 15 per cent and a group at 40 per cent of its capital funds.

On top of that, banks can have an additional exposure of 5 to 10 per cent of capital funds for infrastructure financing. This is, however, subject to RBI approval.

The central bank is now doing away with this practice and giving the banks blanket permission to extend the exposure by 5 per cent with board approval.

These are small steps towards banks' freedom from micro management but they testify to the RBI's acknowledgment of the growing resilience of Indian banks. The boys have become men and they can look after themselves well. The Reserve Bank does not need to breathe down their necks all the time.

The internal process improvements and improved ability to manage risk will eventually enable Indian banks "" on the line of Japanese manufacturing companies "" to move towards total quality management. It may take a while but at least the process has been initiated by the "Annual Policy".