RBI’s Annual Policy

The Reserve Bank of India has decided to reduce interest rates after 3 years. The reduction of 50 basis points is both significant and unexpected and is supposed to give the national economy, which is in a critical condition, a significant boost. The apex banking body has stated that it could reduce the rates even further.

The new policy repo rate of RBI is 8 percent. It was expected, as stated in a poll conducted by Reuters, that the rate will see a reduction of 25 basis points. The reverse repo rate has been brought down to 7 percent, which is a reduction of 50 basis points as well.

The RBI has maintained the same cash reserve ratio of 4.75 percent – it is the amount of cash deposit that every bank has to maintain at the apex bank. The statutory liquidity ratio at 24% has remained unchanged – it is the amount of deposits that a bank has to invest in government securities and other debt instruments.

RBI Annual Policy: Priority Sector

The RBI is yet to accept the recommendations made by the Nair Committee regarding the treatment to be accorded to the priority sector. The committee has asked for a maximum limit of 5 percent on bought deals, bank loans to private sector entities, and securitization transactions.

The governing body of Indian banking has put up the report on its website for comments and will take any decision only after assessing the feedback. The chances of these recommendations being accepted are less as otherwise the apex banking body would have taken a quicker decision.

RBI Annual Policy: Home Loan Pre-Payment Penalties

As opposed to most other countries, majority of the home loans available in India are provided on adjustable basis and experts find it surprising that several companies dealing in home loans have pre-payment penalties. As per the recommendations made by the Damodaran Committee, the new RBI policy has done away with such penalties in case of floating rate home loans.

This is expected to have two major benefits. The home loans will have greater transparency and the banks will now have more incentive to provide customers fixed rate products where they can exercise the pre-payment regulations.

It is a matter of great concern, though, that there is no proper market for fixed rate products in India. The RBI is set to create a working group that will deal with these products. It will also shortly issue extensive instructions regarding this matter.

RBI Policy: Implementation of Basel III

The RBI has stated that it will bring out a schedule for implementing Basel III in India by April 2012 end. An interesting aspect of Basel III is that it makes some important changes to the approach being followed in Basel II. To start with, there is a major difference on stance taken by Basel II on capital adequacy.

Basel III has also introduced specific requirements regarding liquidity on the short and medium term. It has redefined the concept of Tier 1 capital and introduced a counter-cyclicity buffer as well.

It is expected that by the conclusion of May 2012 the apex banking body of India will have published its guidelines on how banks can manage liquidity related risks and these will be done according to the guidelines mentioned in Basel.

RBI Policy: Measures for NBFCs

As per the suggestions of the Usha Thorat Panel, the RBI will publish a fresh set of draft regulations for the non banking financial companies. These will be brought out by the conclusion of June 2012.

Of late, the gold loan companies have become famous but for wrong reasons. Experts are worried at the fact that the RBI has not taken enough steps to deal with the present situation involving these organizations – a couple of gold loan companies are also using the market for public issues with large premiums that are based on previous performance.

It is expected that with the changed regulations these companies will not be able to use their recent performance for such purposes. The new guidelines have prescribed a loan-to-value ratio of 60 percent for these companies.

It also provides some other important changes for these entities like setting the limit of bank exposure for a single gold loan organization to 7.5 percent of the capital funds owned by the bank.

Experts are however of the opinion that this will not restrict the gold loan providers but only assist the banks in providing further loans to these companies as the limit is fairly substantial.

Since this is applicable for a single bank only, the providers of gold loans can procure lines of credit with several banks at a time. This will also increase their dependence on financial assistance from the banks.

A new working group has been set up for the following purposes:

• analyzing the trends that are in demand with respect to gold loans and studying how these have an effect on gold imports
• examining the sources from where the NBFCs are procuring the financial resources for gold loans
• assessing the effect of gold imports on financial and external stability
• examining present practices of NBFCs who provide loans using gold as a collateral
• studying the gold price trends and examining if the NBFCs providing gold loans are, in any way, having an impact on the gold prices

The securitization guidelines of RBI are being awaited since 2010. In the meanwhile, it has issued a couple of drafts of the same. As per the new policies of RBI the guidelines are supposed to be finalized by April end.

The securities markets have been excited with the changes being made by RBI as for some time this is the only positive development for this sector. However, experts feel that this step might not be good enough for the Indian economy. They feel for the change to be effective the reduction should be of 150 to 200 basis points. According to them the change can be considered effective only for the traders.

Last Updated on 4/20/2012

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