Prices of essential commodities are rising and no relief is expected in the near term. The Prime Minister and other ministers have emphasised the need for stringent action against hoarders. Stock limits prescribed by the government are not reinforced by the selective credit control (SCC) of RBI on advances against the hypothecation or mortgage of sensitive commodities like foodgrains, edible oils, sugar, etc. In the 1970s and 1980s, there was coordination to forestall bank credit facilitating the violation of government directives.
The aim of SCC is to prevent the speculative hoarding of sensitive commodities with the help of bank credit. It is not as if the trader does not have other sources of finance, either his own or of moneylenders. Bank credit being less expensive, especially in a regime of low interest rates, the average trader would turn to it first. The route is closed as it was when the minimum margin was kept as high as 75 per cent at the height of the edible oil crisis in the mid-1970s. With the help of credit obtained against stocks, the trader can make further purchases and the process can go on limited only by the margin he has to provide. There is thus a multiplier effect. SCC was introduced for the first time in the 1950s when such a process was discovered resulting in the issue of large bank credit against the stocks of rice in west Godavari. This writer was associated with that study.
Trade — wholesale or retail — also needs credit to facilitate the smooth functioning of the economy and the oiling of the transactions, adding value in terms of time and space. In fact, retail trade is part of the priority sectors. However, any large-scale access to bank credit by wholesale traders or processors of agricultural commodities (rice mills, oil mills, sugar factories) out of sync with earlier trends should raise a cautionary signal for the central bank.
In the past SCC had three elements — minimum margin, minimum rate of interest and maximum level of credit. With the experience gained by this writer at the RBI, he can suggest that the prescription of a stiff minimum margin alone would suffice making the control simple. It will create a favourable public relations impression that the RBI is doing something to deal with the situation.
A Seshan, on email
