New Measures Unveiled By RBI

The RBI has unveiled certain new measures on 6th December 2008 thereby giving a clear signal to banks to reduce interst rates.The Repo rate and reverse repo rate have been reduced by 100 basis points each to 6.5 percent and 5 percent respectively with effect from December 2008.This measure is likely to result in furher cut in interst rates of housing loans and other consumer loans as well as personal loans by banks.
The cumulative impact ofthe measures together with earlier measures would be to step up demand and arrest further moderation of growth.Bank credit is a vital input in development.At present it is difficult to mobilise equity from the market for business expansion and expansion of capacities by corporates.Almost all business entities including small and medium enterprises,tiny units ,self employed etc depend upon bank loans for their productive activities.All these entities can earn a reasonable margin of profit only if cost of borrowed capital i.e bank loans is reasonable andhence bank loans must be available at affordable rates of interst.Although lines of credit have not driedup in India as in US they have become scarce and costly.The present RBI action is a right step in the direction of making credit more affordable.Also there must be plentiful supply of liquidity.The earlier RBI governor went on hiking rates knowing fully well that mounting inflation was due to global factors and not on account of excess demand and excess liquidity.His action in containing liquidity and hiking rates brought about moderation of growth instead of moderation of inflation.I wrote in Bisiness Line that the governor was committing some sort f excesses in monetary tightening.Later developments confirmed what I said.Inflation came down subsequently not because of earler RBI governor's action but because of fall in commodity prices and crude oil prices globally.
The present RBI governor is moving in right direction.At the present juncture in India we need a cheap money policy.As all other avenues of raising capital for productive purposes have dried up bank loans have to assume the role of capital.Heance a chaep money policy is vitalfor accelerating economic recovery.
The new measures will surely provide a lifeline to micro and small enterprises.
The other initiatives such as ''priority'' loan classification for bank lending to home finance companies,a new refinance facility to SIDBI to small enterprises and restructuring facilities for commercail real estate exposures and viable units having cash flow problems have also beem unveiled by RBI.
While the one percentage point cut in Repo rate is but the continuation of the easing interest policy set in motion by RBI a little earlier it is cut in reverse repo rate that will have significant implications for banks.This is a signal that the RBI now thinksthat there isenough liquidity inthe system and intends to encourage banks to lend the surplus funds already made available to them.So far banks used to park surplus funds in the revrse repo account with RBI.Now call rates have moderated to the level of reverse repo rate.Now the banks may start lending as return on investment in reverse repo window has come down.
As banks are goingslow in lending to micro andsmall enterprises the RBI has opened a Rs 7000 crore refinance facility for 90 days to SIDBI which will help SIDBI funded MSEs both directly and indirectly.Bank exposures to MSE s will henceforth be less risky for banks as it gets routed through SIDBI.
The decision of RBI to classify loans granted to HFCs for the purposeof on-lending by way of retail housing loans up to Rs 20 lakhs per part may help banks and HFCs.HFCs can get better access to loans from banks.Also exposure to HFCs will become less risky for banks when compared to direct lending in housing sector.The RBI decision of RBI to classify loans extended to HFCs for onlending to individuals by way of retail home loans up to Rs 20 Lakhs will help banks in meeting theirpriority sector lending targets with ease.
RBI has also come up with guidelines to the effect that banks may restructure loans given to commercial real estate and viable units which are facing temporary cash crunch retainingthem as standard assets .
RBI has not made any changes in SLR and CRR.