RBI relaxes credit stance for the next six months

RBI relaxes credit stance for the next six months

BOMBAY (Reuter): The Reserve Bank of India announced on
Saturday a series of measures aimed at relaxing credit conditions
in the second half of 1996/97 (April-March).

The RBI's six-month policy statement document said banks' cash
reserve ratio (CRR) requirement will be cut to 10 percent from 12
percent in four stages over the coming months.

The central bank also said it cut the interest cap on bank
deposits with maturities of 30 days to one year to 10 percent
from 11 percent, effective Oct. 21.

Banks are free to fix their own interest rates on deposits of
over one year.

The easier monetary conditions could lead to banks reducing
their interest rates.

Indian banks are free to set their own prime lending rates
(PLR). India's major banks' PLRs currently range between 15.5 and
19.0 percent.

The RBI said banks should announce a maximum spread over the
PLR for all advances other than consumer credit. Several banks
are charging rates well above their PLR to borrowers with credit
limits over 200,000 rupees (US$5,620).

"Credibility of the PLR is lost if the actual interest rates
charged by the banks are sharply higher than the PLR," it said.

The CRR cut will be made in four stage of 50 basis points
each. The first will come into effect on October 26, the second
cut to 11.0 percent will be made on November 9.

The next two 50 basis-point cuts will be made in January 1997
but will depend on the prevailing monetary and price conditions,
the RBI said.

Each percentage point cut in CRR would augment bank lendable
resources by 42.75 billion rupees, it said.

The RBI also announced that banks will be allowed to lend
funds from expatriate Indian deposits under the foreign currency
non-resident (bank) account (FCNRB) scheme to domestic borrowers
in foreign currency. Earlier banks were not allowed to lend such
funds in foreign currency in the domestic market.

Banks can set their own interest rates on these loans, but
they must ensure that the loans are used for investment in
productive sectors of the economy and are not personal loans or
loans for consumer durables.

The central bank also said it has decided to allow banks to
buy shares and debentures in the secondary market.

"It has now been decided to allow banks to purchase shares and
debentures in the secondary market within the existing ceiling of
5.0 percent of incremental deposits."

Until now banks were only allowed to subscribe to shares or
debentures in the primary market. Such investment was limited to
5.0 percent of the additional deposits that banks mobilize in the
current year over the previous year.

The RBI also removed some restrictions on the amount of
commercial paper issues by Indian companies.

It also announced that it has decided to raise banks' export
credit target to 12.0 percent from 10.0 percent.