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April 26, 2002 | 1935 IST
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Rollback may put pressure on interest rate structure

The partial rollback of the direct and indirect tax proposals in the 2002-03 Budget would put pressure on the interest rate structure of the economy which left little room for the Reserve Bank of India to reduce the bank rate in its busy season Credit and Monetary Policy to be announced on April 29.

According to leading bankers and trade bodies, the rollback in tax proposals, involving a total revenue loss of Rs 28.50 billion, would discourage the RBI Governor Bimal Jalan to go ahead with a softer interest regime since the Centre would be more dependent on the open market borrowing to cover up its revenue losses during the current financial year.

''This would put stiff pressure on the interest rate which in turn would restrict the maneuvering position of the RBI to deal with the economic reform process, mainly in the financial sector,'' said a leading banker who did not wish to be named.

However, majority of the bankers felt that the RBI would reduce the cash reserve ratio by at least one percentage point from the current level of 5.5 per cent in order to infuse additional liquidity into the system to meet the growing borrowing demands of the government in the current year.

However, they ruled out a bank rate cut at this juncture and said that the central bank would maintain a 'status quo' in respect of interest rate regime as is being done by several central banks in the western world.

Expressing apprehension over growth prospects of the economy, Indian Merchants Chamber President Arvind Jolly said that the RBI should bring the CRR level to 3 per cent as pronounced earlier so that the banks would be in a position to offer higher credit to the industrial sector.

He suggested that the central bank should come out with a separate prime lending rate for the small and medium industrial sector in order to bring down the production cost.

Today, in spite of lowering of interest rate for small savings, the ultimate borrowing rate for SMEs is in the region of 14 to 15 per cent.

There is also a need to offer concessional credit to services sector and self-employment individuals who need to grow in an emerging competitive environment, he said.

Punjab National Bank Chairman and Managing Director S S Kohli also expressed the hope that the RBI would go for a cut in the bank rate as well as cash reserve ratio to facilitate credit availability at competitive cost.

He also appreciated the efforts made by the apex bank to address the issue of non-performing assets in the banking sector and hoped that this time more stringent steps would be taken to tackle the problem.

Considering the uncertain external environment, Jalan would lay out his policy framework that is expected to focus on higher export refinance limit, at least at 50 per cent from the current level of 15 per cent and also deepen the reforms in non-bank financial sector as well as cooperative sector in order to bring them at par with the banking sector norms.

Efforts would also be made to address the non-performing assets in the banking sector which is around 11.4 per cent of the total loans provided by the banks to their borrowers. RBI may ask the banks to work out a strategy at their respective board level in order to move towards the global practices.

''There is a need to tighten asset classification and income recognition norms, said Janki Ballabh, Chairman of the State Bank of India.

There are also indications that the central bank may ask banks to assign a 100 per cent risk weightage to all state Government backed bonds irrespective of defaults. State Government guaranteed debt carry a low risk weightage of 2.5 per cent, similar to Central bonds but are hiked to 100 per cent in case of a default.

All-India Association of Industries President Vijay Kalantri said that RBI might find it difficult to carry out its responsibility of a lower interest regime to provide boost to the economic growth mainly due to rollback of the budget proposals.

''The proposed reversal in reduction in tax rebates on different savings instruments may take the wind out of the credit policy's main plank,'' he said.


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