Mumbai, Nov. 3: Admitting that the reduction in bank lending rates have benefited only corporate houses and the housing segment so far, the Reserve Bank today announced certain measures in an effort to nudge banks to allow the benefits of softer interest rate to flow into other sectors of the economy.
The sectors that have missed the benefit of lower interest rates are the farm sector, the small-scale units and micro-finance to small entrepreneurs.
“It has been the endeavour of RBI to improve the agricultural credit delivery mechanism by simplifying procedures, encouraging decentralised decision making and enhancing competition,” the RBI’s monetary policy said.
“In order to progress further in meeting the credit needs of the agricultural sector, it is proposed to constitute an advisory committee to suggest short-term and medium term measures to enhance credit flow to this sector,” RBI added.
The committee is expected to address the issue of credit delivery to farmers, especially small farmers, tenants, labourers, supplies of inputs to agriculture and purchases of output, the policy statement added.
The committee, RBI said will explore the scope for involving innovative location-specific catalytic agents to bridge the gap between banking institutions and the demand for timely credit in rural agencies. The committee is also expected to help in capturing new technological developments in the cause of improving credit delivery.
The credit flow to the small scale industries is also being looked into. Keeping in view the credit needs of this sector, it is proposed to constitute a working group to assess the progress in the implementation of two committees set up before.
Further, the Reserve Bank today again nudged banks to adopt benchmark prime lending rates instead of a series of PLRs for various tenures of loans.
The Indian Banks’ Association (IBA) set up a sub-group to formulate broad guidelines for fixing the benchmark prime lending rate (B-PLR) by individual banks.
RBI has asked banks to sharpen their risk assessment techniques, particularly for retail lending, so as to guard against any adverse impact on credit quality and directed them to address the issue of rigidity in downward movement of lending rates.
The central bank has also recently removed interest rate restriction of the prime lending rate (PLR) being the floor rate for loans to retail and personal segment, which should provide further impetus to retail lending.
“Nevertheless, keeping in view the intense competition in this sector, banks need to sharpen their risk assessment techniques so as to guard against any adverse impact on credit quality,” it said.
The public sector banks have reduced their deposit rates over one year from a range of 5.25-7.00 per cent in March 2003 to 5-6 per cent by October 2003.
RBI said apart from subdued credit growth, which would continue to cause concern unless the anticipated pick-up materialises, the fact of overall rigidity in the downward movement of lending rates as well as inadequacy in quality of service to some sections coupled with reduction in deposit rates requires “introspection and immediate action on the part of all financial intermediaries.”
Trends in the flow and composition of savings as well as availability of credit to some highly productive and socially critical sectors should be a matter of importance to all in the financial system, it said. While credible actions, particularly by commercial banks, would be essential, innovative measures by all concerned may have to be considered in due course.