ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Mistimed Tightening of Prudential Norms

Policy Perspectives and Developments STICKING to the new ground rules set out in the April monetary and credit policy document, the RBI governor's latest policy statement confines itself to a factual midterm review of the macro-economic and monetary developments during 1998-99 without introducing any short-term policy measures. However, against the backdrop of the second Narasimham Committee report* a number of long-term banking sector reform measures, as also some structural changes in the operations of the money market, have been announced in the statement, Almost all of the reform measures concern the introduction of tighter prudential norms' Increase in the minimum capital to risk assets ratio (CRAR) from 8 per cent to 9 per cent, introduction of a 2.5 per cent weight for market risk in the holdings of government and approved securities, stricter classification of assets for provisioning purposes and a general provisioning of 0,25 per cent on standard assets are some of the measures proposed to be introduced by the year ending March 31,2000. These arc measures of an incremental and not earth shaking character; there cannot be any objection to them as desirable standards in the long run. But in an environment where the credit delivery system, particularly in its distributional goals, is choked, the emphasis on such rigorous prudential norms may further damage the process of credit supply specially for mediumand small-scale industries and the informal sector; the measures could have waited for a more congenial environment. Instead, a satisfactory approach should have been to study the way the prudential norms have been implemented so far and the kind of impact they have had on normal banking activities like lending, In the first place, these market- based norms in line with the international best practice have been imposed on the public sector banks in India without any modicum of organisational reforms and managerial autonomy. Nor have they been, secondly, given the freedom to go to the market to mobilise fresh capital.

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