Credit Policy for the year 2003-2004

Annual Monetary and Credit Policy for the year 2003-2004

Statement by Dr. Bimal Jalan, Governor,
Reserve Bank of India on Monetary and Credit
Policy for the year 2003-04

The Statement consists of three parts:
(I) Review of Macroeconomic and Monetary Developments during 2002-03,
(II) Stance of Monetary Policy for 2003-04, and
(III) Financial Sector Reforms and Monetary Policy Measures.

Annexes

I.	Working Groups: Progress Report
II.	Legal Reforms: Review of Developments
III.	Technology Upgradation: Review of Developments
IV.	Developments in Government Securities Market
V.	Recent Foreign Exchange Liberalisation Measures: Current and Capital Accounts

Annex I. Working Groups: Progress Report

Flexibility in Interest Rate

As indicated in the mid-term Review of October 2002, banks were encouraged to make efforts to popularise flexible deposit schemes among the depositors as these were in the long-term interest of banks as well as depositors. Further, in order to improve flexibility in the interest rate, banks were given freedom to decide the period of reset on variable rate deposits. In this context, a Working Group has also been constituted (Chairman: Shri H.N. Sinor, Joint Managing Director, ICICI Bank Ltd.) with members from major banks and RBI to examine various issues concerning the deposit rates including floating rate of interest on fixed deposits.

Transparency and Accounting Standards

It was indicated in the annual policy Statement of April 2002 that a Working Group (Chairman: Shri N.D. Gupta, former President, ICAI) was constituted to identify compliance by banks, as also gaps in compliance with the accounting standards issued by the ICAI and recommend steps to eliminate/reduce the gaps. On the basis of recommendations of the Group, final guidelines were issued for compliance with effect from the accounting year ended March 31, 2003.

Progress in Corporate Debt Restructuring

As indicated in the mid-term Review of October 2002, a High Level Group (Chairman: Shri Vepa Kamesam, Deputy Governor) was constituted to review the operations of Corporate Debt Restructuring (CDR) scheme in order to identify the operational difficulties, if any, and suggest measures to make the scheme more efficient. Based on the recommendations of the High Level Group and in consultation with the Government, a revised scheme of CDR was finalised and issued to banks for implementation.

Short-term Liquidity Forecasting Model

It was indicated in the mid-term Review of October 2002 that a short- term liquidity forecasting model was developed by RBI under the guidance of an Advisory Committee of academics and was operationalised for internal evaluation. The generic form of the model was made available on RBI website for suggestions and comments. The results of the model are being used by RBI for policy analysis and assessment since November 2002. The model is also back-tested routinely to validate its performance by comparing the forecasts with actuals. The model is being updated on an ongoing basis to improve its performance.

International Financial Standards and Codes

It was indicated in the annual policy Statement of April 2002 that the ten Advisory Groups constituted by the Standing Committee on International Financial Standards and Codes had submitted their reports. As indicated in the mid-term Review of October 2002, an internal Technical Group, constituted by the Standing Committee to assess India’s position vis-à-vis international standards on ‘market integrity’ also submitted its report. Subsequently, a synthesis report covering the recommendations of all Advisory/Technical Groups was submitted to the Standing Committee. These reports, including the report of the Standing Committee, were placed on the RBI website for wider dissemination and comments.

Residential Mortgage Backed Securities

As indicated in the mid-term Review of October 2002, the Working Group (Chairman: Shri R.V. Verma, Executive Director, National Housing Bank) set up to examine the modalities for widening the investor base, improving the quality of assets, creating liquidity for trading in mortgage backed securities (MBS) of housing finance companies (HFCs) and other related issues submitted its report in December 2002. The recommendations of the Group are under examination.

Annex II. Legal Reforms: Review of Developments

Legislations Enacted

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Act No.54 of 2002).
The Negotiable Instruments (Amendments & Miscellaneous Provisions) Act, 2002 (Act No.55 of 2002).
The Prevention of Money Laundering Act, 2002 (Act No.15 of 2003).
The Companies (Amendment) Act, 2002 (No.1 of 2003).
The Companies (2nd Amendment) Act, 2002 (Act No.11 of 2003).
Unit Trust of India (Transfer of Undertakings & Repeal) Act, 2002.
The Multi-State Co-operative Societies Act, 2002.

Bills Under Consideration of the Parliament

The Financial Companies Regulation Bill, 2000 (Bill No.196 of 2000).
Banking Companies (Acquisition & Transfer of Undertakings) & Financial Institutions Laws (Amendment) Bill, 2000.
The Fiscal Responsibility & Budget Management Bill, 2000.
Industrial Development Bank (Transfer of Undertaking & Repeal) Bill, 2002.

Legislative Proposals Under Consideration of the Government

Payment Systems Bill, 2002.
Amendments to the Banking Regulation Act, 1949.
Amendments to the Reserve Bank of India Act, 1934.
Draft Bill on Credit Information Bureau Regulation.
Bank Deposit Insurance Corporation Bill.
Factoring of Debts due to Industrial & Commercial Undertaking Bill, 2002.
Proposal to replace the Public Debt Act, 1944 with a new Government Security Act.
Amendments to State Bank of India Act, 1955 & State Bank of India General Regulation 1955.
Amendments to State Bank of India (Subsidiary Banks) Act, 1959.
The Urban Co-operative Banks Supervisory Authority Act, 2001.
Proposal for Divesting the RBI Shareholding in the Capital of SBI, NHB & NABARD.
Proposal for Legislation on Financial Fraud (Investigation, Prosecution, Recovery & Restoration of Property).

Annex III. Technology Upgradation: Review of Developments

Implementation of Centralised Funds Management System

The centralised funds management system (CFMS) provides for a centralised viewing of balance positions of the account holders across different accounts maintained at various locations of RBI. While the first phase of the system covering the centralised funds enquiry system (CFES) has been made available to the users, the second phase comprising the centralised funds transfer system (CFTS) would be made available by the middle of 2003. So far, 54 banks have implemented the system at their treasuries/funds management branches.

Certification and Digital Signatures

The mid-term Review of October 2002 indicated the need for information security on the network and the use of public key infrastructure (PKI) by banks. The Controller of Certifying Authorities, Government of India, have approved the Institute for Development and Research in Banking Technology (IDRBT) as a Certification Authority (CA) for digital signatures. Consequently, the process of setting up of registration authorities (RA) under the CA has commenced at various banks. In addition to the negotiated dealing system (NDS), the electronic clearing service (ECS) and electronic funds transfer (EFT) are also being enhanced in terms of security by means of implementation of PKI and digital signatures using the facilities offered by the CA.

Committee on Payment Systems

In order to examine the entire gamut of the process of reforms in payment and settlement systems which would be culminating with the real time gross settlement (RTGS) system, a Committee on Payment Systems (Chairman: Dr. R.H. Patil) was set up in 2002. The Committee, after examining the various aspects relating to payment and settlement systems, submitted its report in September 2002 along with a draft Payment Systems Bill. The draft Bill provides, inter alia, a legal basis for netting, apart from empowering RBI to have regulatory and oversight powers over payment and settlement systems of the country. The report of the Committee was put on the RBI website for wider dissemination. The draft Bill has been forwarded to the Government.

Multi-application Smart Cards

Recognising the need for technology based payment products and the growing importance of smart card based payment flows, a pilot project for multi-application smart cards in conjunction with a few banks and vendors, under the aegis of the Ministry of Communications and Information Technology, Government of India, has been initiated. The project is aimed at the formulation of standards for multi-application smart cards on the basis of inter-operable systems and technological components of the entire system.

Special Electronic Funds Transfer

As indicated in the mid-term Review of October 2002, national EFT (NEFT) is being introduced using the backbone of the structured financial messaging system (SFMS) of the IDRBT. NEFT would provide for movement of electronic transfer of funds in a safe, secure and quick manner across branches of any bank to any other bank through a central gateway of each bank, with the inter-bank settlement being effected in the books of account of banks maintained at RBI. Since this scheme requires connectivity across a large number of branches at many cities, a special EFT (SEFT) was introduced in April 2003 covering about 3000 branches in 500 cities. This has facilitated same day transfer of funds across accounts of constituents at all these branches.

National Settlement System

The clearing and settlement activities are dispersed through 1,047 clearing houses managed by RBI, the State Bank of India and its associates, public sector banks and other institutions. In order to facilitate banks to have better control over their funds, it is proposed to introduce national settlement system (NSS) in a phased manner.

Real Time Gross Settlement System

As indicated in the mid-term Review of October 2002, development of the various software modules for the RTGS system is in progress. The initial set of modules is expected to be delivered by June 2003 for members to conduct tests and familiarisation exercises. The live run of RTGS is scheduled towards the end of 2003.

Annex IV. Developments in Government Securities Market

Calendar for Issuance of Dated Securities

The system of releasing the calendar for issuance of Government of India dated securities every half-year was introduced in 2002-03. These calendars were generally adhered to with some minor deviations with regard to the timing of the auctions, amounts raised and also the tenor of the security from the scheduled issuances. An indicative calendar for the first half of the financial year 2003-04 was issued on March 31, 2003.

Consolidation of Debt of Government of India

The Reserve Bank has been resorting to consolidation of securities since 1999 through reissuance of existing securities. In line with this process, 19 out of 31 securities issued during 2002-03 were reissues. Out of an amount of Rs.1,25,000 crore (gross) raised through dated securities under the market borrowing programme of the Central Government, an amount of Rs.74,000 crore (59 per cent of the gross amount) represented reissuances.

As at the end of March 2003, out of 117 outstanding marketable government securities of Rs.6,73,905 crore, 29 securities with outstanding stock of Rs.10,000 crore or more account for 54 per cent. RBI will continue to undertake such passive consolidation through reopenings.

The Government of India has also announced in Budget 2003-04 its intention to offer a buy-back of loans contracted under the high cost regime of the past and issue new securities at current market yield. The buy-back will be entirely on a voluntary basis from banks that are in need of liquidity, or encashing the premium for making provisions for their non-performing assets (NPAs) thereby improving their balance sheets. Such switch operations would also result in consolidation of debt. The details of the schemes are being worked out by the Government in consultation with RBI.

The Government of India also introduced a debt swap scheme in order to restructure state governments' debt. This policy measure will help in reduction of the interest burden of the States by prepayment to the Centre out of the proceeds of fresh market borrowings and additional resources out of full allocation of small savings collections to the States. In 2002-03, Rs.10,000 crore were raised as market loans for this purpose. The debt swap scheme is expected to continue for the next few years depending on market conditions and liquidity position.

Trading on Stock Exchanges

In order to enlarge the number of participants and to provide country-wide access to trading in government securities, a scheme of anonymous screen-based order-driven trading in government securities on the stock exchanges in accordance with the accepted best practices relating to trading and settlement was announced in Budget 2002-03. Accordingly, a facility has been provided to buy and sell government securities through the stock exchanges (NSE, BSE and OTCEI) with effect from January 16, 2003.

Extension of Repo to CSGL Account Holders

Earlier, only subsidiary general ledger (SGL) account holders with RBI, Mumbai, were permitted to enter into ready forward (repo) transactions in government securities and Treasury Bills. In order to increase the investor base of repo market coupled with the need to make call/notice money market a pure inter-bank market, RBI has now permitted non-SGL account holders to enter into repos in government securities including Treasury Bills, effective from March 3, 2003. The non-SGL account holders can now enter into ready forward contracts through their gilt accounts maintained with the custodians under the constituents’ subsidiary general ledger (CSGL) facility, subject to certain guidelines.

Government Securities Lending Scheme of CCIL

Clearing Corporation of India Limited (CCIL) has been a major facilitator of transactions in the government securities market as it provides guaranteed settlement of trades. To ensure smooth settlement, CCIL has been permitted by RBI to enter into arrangements with select members to borrow required government securities from them under its Securities Lending Scheme.

Guidelines for Uniform Accounting of Repo/
Reverse Repo Transactions

The Reserve Bank has issued guidelines for uniform accounting norms for repo and reverse repo transactions in consultation with market participants.

Rollover of Repos

In the mid-term Review of October 2002, the proposal to allow rollover of repo contracts using the same securities between the same counterparties was announced. On completion of modifications in settlement related systems, the rollover of repos will be permitted subject to proper safeguards.

Operationalisation of STRIPS

The Reserve Bank has accepted the recommendations of the Working Group on operational and prudential guidelines on STRIPS for dates for consolidation of coupon strips (March/September 25 and May/November 30). In order to consolidate coupon volume, it has been decided to issue new securities to the extent feasible. The primary dealers (PDs) which meet certain financial criteria laid down for this purpose will be authorised to undertake stripping and reconstitution of securities. The Reserve Bank will act as a registry for stripped bonds. The accrued discount value of the STRIPS along with the book value of the same will be reckoned for SLR purposes. FIMMDA will publish the market rates for stripped zero coupon bonds on a monthly basis for valuation and tax purposes. At present, RBI is in the process of drawing up the detailed specifications required for the development of the stripping/reconstitution module in the public debt office (PDO)/negotiated dealing system (NDS).

Annex V. Recent Foreign Exchange Liberalisation
Measures: Current and Capital Accounts

Corporates

Exporters are permitted to extend trade related loans/advances to overseas importers out of their exchange earners’ foreign currency (EEFC) balances without any ceiling.
General permission is given to entities in the special economic zones (SEZs) to undertake hedging transactions in the international commodity exchanges/markets to hedge their commodity price risk on import/export on "stand-alone" basis.
A unit in domestic tariff area (DTA) can receive foreign exchange out of the foreign currency account of a unit in SEZs which is permitted to be treated as eligible for credit to its EEFC account.
The limit for advance remittance without bank guarantee for import of goods into India raised.
Indian corporates having overseas offices permitted to acquire immovable property outside India for their business as also staff residential purposes with prior permission of RBI.
Indian companies are allowed to retain abroad funds raised through American Depository Receipts (ADRs)/Global Depository Receipts (GDRs), for any period to meet their future forex requirements.
Considerable liberalisation and simplification has been made in procedures for foreign exchange transactions and reporting system in several areas such as disinvestment of shares through issue of ADRs/GDRs, transactions covering life insurance/reinsurance, documentary evidence for imports, write-off of unrealised export bills, reporting system for foreign exchange transactions by banks etc.
Swap transactions enabling customers to hedge their foreign exchange exposures allowed without any limit.
Rebooking of cancelled contracts by customers is freely permitted in respect of all foreign exchange exposures falling due within one year.

Resident Individuals

Residents have been allowed to open resident foreign currency (RFC) (Domestic) accounts without any ceiling.
Resident individuals are permitted to remit foreign exchange for acquisition of foreign securities under employees’ stock option plan (ESOP) scheme without any monetary limit.
Release of foreign exchange for private visits increased.
Resident shareholders of Indian companies are permitted to offer their shares for conversion to ADRs/GDRs and to receive the sale proceeds either in foreign currency or by way of credit to their EEFC/ RFC(Domestic) accounts or to their rupee accounts in India at their option.

Non-resident Indians

Non-resident Indians (NRIs)/persons of Indian origin (PIOs) and foreign nationals are permitted to remit up to US $ 1 million per calendar year out of balances held in non-resident ordinary (NRO) accounts/sale proceeds of assets for the purpose of education, medical expenses etc.
The lock-in period for repatriation of sale proceeds of immovable property (other than agricultural land/farm house/plantation property) purchased in India by NRIs/PIOs removed.
Authorised dealers (ADs) are permitted to issue international credit cards (ICCs) to NRIs/PIOs and to remit refund of funds received for purchase of shares.

Further Facilities for Investments

Investments Abroad

Resident individuals, listed Indian companies and mutual funds are permitted to invest in certain listed companies abroad.
Investment norms for undeployed FCNR(B) funds in overseas markets further liberalised.
Banks are allowed to invest their unimpaired Tier I capital in overseas money market or debt instruments without any percentage or absolute limit subject to approval by their Board of Directors.
Indian companies can invest abroad funds raised through ADRs/GDRs in bank deposits/certificates of deposit (CDs), Treasury Bills and other monetary instruments pending repatriation/utilisation of such funds.

Foreign Investments in India

Indian companies are allowed to remit the redemption proceeds of the non-convertible debentures (NCDs)/partial-convertible debentures (PCDs) issued by them to NRIs/OCBs without prior permission of RBI.
The foreign institutional investors (FIIs) are permitted to hedge the market value of their entire investment in equity as on a particular date without any reference to a cut-off date.
General permission has been accorded to ADs to offer forward contracts to persons resident outside India to hedge the investments made by them in India.
Foreign banks in India are allowed to hedge their Tier I capital in Indian books without any restriction on timing of the hedge transactions.