chapter 1-credit policy

8/3/2019 Chapter 1-Credit Policy

1/51

CHAPTER:1 CREDIT POLICY

CREDIT POLICY OF RBI

CREDIT OPERATIONS-CONVENTIONALAND INDUSTRIAL


2/51

INTRODUCTION

Credit operations in banking system areguided by RBI.RBI translates its views on economy in toaffirmative actions, through changes in themonetary policy.Policy announcements are made bi-annual in

the moths of April and October.Slack season and busy season credit policy,respectively.


3/51

Changes are announced in the policy,intermittently, depending upon the changestaking place in the monetary aggregates.

The policy normally aims at fine-turning;a) the availability

b) the cost of funds

to the productive sectors and to ensure non-inflationary growth.


4/51

Credit policy of RBI

RBI attempts to lower the cost of funds tospur growth, so that cheap and abundantmoney may persuade industry to set up newcapacities or produce, to the maximum extentavailable.This is called expansionary policy.


5/51


On the other hand, if the money growth is toofast with supply failing to keep pace withdemand, Prices of goods and commodities tendto rise, leading to inflation-in such situation RBItightens the monetary aggregates.

Competing uses of funds, vie for share in a

smaller pie, which results in to interest rateincrease-this is called contractionary policy .


6/51


7/51


The funds sourced by the banks are lent orinvested.Deposits received by the banks in entirety cannotbe lent, in view of CRR and SLR obligations.

CD ratio tracks the volume of credit, as apercentage of deposits in banks.

Changes in CRR/SLR announced by RBI impactslendable resources of banks and CD ratio.


8/51


Availability of funds does not mean that bankswould lend.

Banks match risk profile of borrowers withreturns they expect.If interest rates are low and lending risks arehigh, bank would rather not lend.There is an issue of capital adequacy also.


9/51


By investing in zero risk government paper,the banks do not have to block a part of theircapital, which they have to do when they lendto individual borrowers.

This capital again has a cost.


10/51


11/51

Steps in policy formulation .

The credit policy has monetary and creditobjectives.The monetary objective is basically to achieveprice stability. This is achieved by controlling thesupply of money in the economy.This is to ensure that money growth is not inexcess of demand arising out of real out putgrowth.The extent of liquidity in the economy is indicatedby the growth of M3.


12/51

Steps in policy formulations .

The credit objective is to ensure adequate supplyof credit to realize the targeted growth.This includes fixation of total volume of credit aswell as proper allocation of credit, amongstvarious segments, borrowers and regions.The name of monetary policy changed with theonset of liberalization, to monetary and creditpolicy.The change is to signify the importance of creditto economic activity.


13/51

Steps in policy formulation .

Setting money supply targetsAdjusting the CRR and SLR

Charting the immediate course for the entireeconomyFunction as a fine tuning device for achieving

the targets, set in the annual budget.


14/51

3 parts of monetary & credit policydocument

I PARTReviews the recent performance of the economy in terms

of broad parameters-- such as growth rate in money supply- Gross domestic product- Reserve money- Aggregate deposits of commercial banks- Food and non food credit- Inflation- Exports and imports, state of stock market, industrial

production and review of foreign exchange market.


15/51

Monetary & credit policy

PART-IIExplains the RBI s stance on the monetary

policy, for the year.It gives estimates of GDP growth rateFixes the money supply growth rate for the

yearIdentify key drivers to implement the policytargets.


16/51

Monetary & Credit Policy .

PART IIIOutlines credit policy measuresThese structured measures include, changes pertainingto the functioning of money marketGovernment securities marketPolicies relating to deposits and lending ratesAgricultural and rural creditPrudential norms for banksThe role for the financial institutionsDetails the changes in the bank rate, export refinanceterms etc,.


17/51

Concerns of RBI

Cost of funds or credit cannot be ignoredInterest of the depositors also cannot be

ignored, for mobilization of savingsThe policy envisages a balance between thetwo objectives.

RBI also tries to ensure that the volatility inthe foreign exchange market is kept undercheck.


18/51

CONCERNS OF RBI

Price stability achieved by controlling inflation inducesmore confidence to the citizens on the economy.Business sector is induced to plan their future activities

properly, by making realistic forecasts.Controlling the growth of money supply is the mainconcern, since greater the growth of money supplycompared to growth rate of GDP, the higher will be therate of inflation.The money supply growth rate is curtailed throughopen market operations of buying or selling securities.


19/51

SLR and CRR

Higher levels of SLR and CRR squeezes, creditcreation capacity of banks along with moneymultiplier and reserve deposit ratio.Money multiplier-combination of currency

deposit ratio-the extent to which the public iswilling to hold the currency, compared todepositing with the banks.Reserve deposit ratio-SLR, CRR : deposits


20/51

Easy & tight money policies

When credit creation capacity is lowered-RBI issaid to be following tight money policyWhen reserve deposit ratio is reduced, by

lowering CRR and SLR- This is called the easymoney policy.The monetary objective is achieved throughcontrol of M3 growth-by open market operationsor change in CRR and SLR.The monetary objectives also help in satisfactionof credit objectives, by ensuring proper allocationof credit to different sectors.


21/51

Policy-aims at credit objective

By enhancing market driven mobility of fundsDesigned to develop and deepen the financial

market, to ensure free flow of resourcesImprove allocative efficiencyGive greater freedom to banks and other

market participantsCovers money market, the Government DebtMarket


22/51

Policy-aims at credit objectives..

Policy measures include abolition of CRR/SLRrequirement for interbank liabilitiesAllowing larger participation in Repo transactions

Reducing size of certificate of depositsAllowing FII s to operate in all dated governmentsecuritiesReducing minimum period of term depositsFreeing lending rates for loans above Rs:2 lacs etc


23/51

Prevalent credit policy of RBI

Covers various aspects of banking operationMicro-economic indicators do not seem to be

favorable, for growth with price stabilityRising inflation is a cause for concernGDP growth is estimated at 8.50%

The external sector found to be comfortableExports doing well, however current accountdeficit is significant percentage of GDP


24/51

Monetary & credit policy

Fiscal deficit of central government is budgeted at4.7% of GDPGovernment borrowings to be reduced

RBI proposes to continue to ensure that alllegitimate requirements for credit are met,consistent with price stabilityRBI to continue its policy of active demand

management of liquidity through OMO, includingtwo way purchase and sale of treasury billsFurther reduction in CRR, when ever required


25/51

Monetary & Credit policy ..

Policy assumes further revival of industrialsector-IIP

Good performance by exportersReduction in inflationBroad money ( M3) expansion at 14.5%

Bank deposit increaseNon food credit growth of 18% or over


26/51

Measures to achieve objectives

Liquidity adjustment facility-changing theoperating procedures, including auction methodsand periods

Transition of call money market to inter bankmarketComprehensive and coherent programme of rationalization of liquidity support available tothe system, through various facilitiesMeet every genuine requirement of financialmarket


27/51

Measures to achieve objectives..

Export credit refinance to scheduled commercial banksInterest rate on export credit-sub PLR ratesInterest subvention scheme

LIBOR rate and loading factor reviewed, on foreigncurrency loans-pre shipment and post shipmentCorporates to route all transactions through PD sNon-banks allowed to lend in interbank call moneymarket, up to 85 % of their, average daily lending's, incall marketThe minimum maturity period for term deposits of Rs;15 lacs and above is reduced to 7 days


28/51

Measures to achieve objectives..

Interbank term liabilities of maturities of 15 days and aboveare exempted from CRRTenure and dates of payment of treasury bills reviewed.On the basis of objective and transparent policy, the bankscan offer loans above Rs:2lacs at bellow PLR rates90 days norms for classification of asset as sub-standard/NPAIn line with international practices, the prudential exposurenorms-banks to adopt the concept of capital fund asdefined under capital adequacy systemInvestments mostly to be dematerialized form


29/51

Other policy issues

Banks have been given freedom to chargeinterest rates with out reference to PLR forloans covered by refinance schemes of DFIsLoans against FCNR-B schemeAll investment including those outside SLRshall carry risk weights of 2.5%

Prudential exposure norms- for individual,association/partnership, corporates andinfrastructure


30/51

Sectoral flow of credit

Priority sectorNon-priority sector

Infrastructure financingTake out financingNBFC financing

Export creditImport finance


31/51


32/51

Security norms-RBI

Banks/Consortia/syndicates are free to decidethe 1) nature, 2) type, 3) margin and 4)quantum of security, to be obtained from the

borrowers.Any additional security where ever requiredneeds to be taken to address probable creditdefault risk.Security to be subjected to MAST principlesand to cover the loan amount.


33/51

Period of loan & Repayment

Should be based on appraisal and cash flow of projects

Banks are allowed to decide the extent andperiod of the loan-Minimum period of the loan

Maximum periodMaturities and roll over facilityGranting of WCDL, Repayment thereof.


34/51

Liberalized regime-RBI

Banks can break-up the loan components, into various parts of different maturities foreach segments and allow roll over accordingto borrower s needs.Bills limit may be carved out.Bills limit to include cheque purchase also.Banks must satisfy that the bills limits are notmisutilised.


35/51

Credit Syndication

At present, borrowing corporate with huge financialrequirements for investing in current/capital asset,have a number of funding alternatives-

1.External commercial borrowings 2. Suppliers credit 3.FCNR-B loans 4.Floating rate notes5. Euro bonds 6. Exim bank loans 7. GDR & ADR s8. Joint Venture Partners 9. Private equity investors

10. Foreign institutional investors 11. Term loan &Working capital limits from banks, 12. term loans fromDFI, 13. Non-convertible debentures, 14. commercialpapers 15. Leasing & hire purchase etc,.


36/51

SYNDICATED CREDIT

Is an agreement between two or more lendinginstitution to provide, a borrower, a credit facilityusing common loan documentation.

In loan syndication, the group of lenders isgenerally small and members can consult eachother.Each lender can take up matters of his interestwith the borrower-no majority view required.In case of default/recovery each member canenforce his debt-amount recovered to shared-prorata.


37/51


38/51

Exposure limits and group approach

As a prudential measure, aimed at better riskmanagement and avoidance of concentrationof credit, RBI has advised the banks to fixlimits on their exposure to-Specific IndustrySpecific Sectors

And prescribed regulatory limits on bank sexposure to individual and group borrowers


39/51

Exposure limits

Exposure shall include1.credit exposure-100% of both funded andnon fund based credit limits

and2. Investment exposure ( BG s, DPG s, LC S,Underwriting and derivative products such as

forward rate agreement, interest rate &currency swaps, forward contracts, optionsand similar commitments.


40/51

Prudential exposure norms

Credit exposure limit to single or groupborrowers shall be at 15% and 40% of capitalfunds respectively in the normal courseCapital funds=Tier I and Tier II CapitalAdditional allowance of 5 and 10% of capitalfunds, for infrastructure projects.Exceptional circumstancesSubstantial exposure


41/51

Prudential exposure norms

Exemptions-1.Existing credits to sick industry under

rehabilitation2. Borrowers to whom limits are allocated

directly by the RBI-food credit3. Where principal and interest are fully

guaranteed by GOI.4. Loans and advances against the term deposits

with specific lien on such deposits


42/51

Concept of prime lending rate

Definition:prime lending rate is the lending rate that abank charges its most creditworthy or primecorporate customers, who pose near zero risk,so that the earnings from such lending willcover all costs and leave a margin adequateenough to service the capital .


43/51

Prime lending rate

A bench mark or index for actual ratesLoans by banks are generally priced at a spreadover the PLR

Initially introduced as the minimum lending ratefor the best corporate customer-the primeborrowerSub-PLR and PLR plus-interest code definitions

PLR is determined by each bank, based on its ownperception, funds policies, working capital andterm loans etc,.


44/51

Pricing of products

Annual rating of the customer and CPASMinimum current ratio of 1.33:1Debt equity ratio of 2:1

General compliance of terms, inventory norms,information under QIS, stock statement submissionTerm loan installment repaymentSubmission of audited accounts, renewal papers

Conduct of account/value of accountManagement risk, credit risk, industry risk and otherparameters of account


45/51

Factors on which PLR is based

Supply and demand position of funds in the banking systemand bankPresent and anticipated cost of funds, borrowings andattendant costs for servicing the deposits, establishment

cost etc,.Present level of spread or required spreadAsset/liability mismatch management costNeed to retain existing customers and attract newcustomers

To remain fiercely competitiveLevel of NPA in a bank, resultant provisioning and write off requirement


46/51

General issues on interest rates

Banks are free to determine their own lending rates onadvancesBanks should fix PLR with approval of ALCO- underALM guidelinesPLR/PTLR should be declared and indicate maximumspread over PLR for all advancesFor credit limits bellow Rs:2 lacs, interest will notexceed PLR

Banks should have enabling clause in the loanagreements to vary interest-floating rateCharging of interest at monthly rests with quarterlycompounding


47/51

Bank rate & Reference rate

The bank rate (BR) is defined in section 49 of RBI Act of 1934-as the standard rate at whichthe bank is prepared to buy or rediscount bills

of exchange or other commercial papers,eligible for purchase, under this Act.Bank rate served as an important signal whenever it was activated having repercussions.Used to counter inflation as a macro-economic tool


48/51

Infrastructure financing

Infrastructure means the basic structuralfoundationsGovt. of India has identified sectors like Power,Telecom, Transport, Roads, Highways, Bridges,Ports, Airports, industrial parks, Hospitals,educational institutions, Water supply, Irrigationprojects, Sewerage and Sanitation etc underinfrastructure

Earlier infrastructure was a state activity and atpresent private, PPP, BOT, BOLT, BOS, BOLprojects are common.


49/51

Infrastructure Financing ..

Characterized by large capital cost, long gestationperiod and high leverage ratiosIt is multi-sourced with usual sources like,multilateral or bilateral agencies, capital markets,commercial banks and public finance.RBI guidelines- Banks and FI s are free to sanction

TLs for technically feasible, financially viable andbankable projects, undertaken both by public andprivate sector, individually or together.


50/51

RBI on infrastructure financing

Amount sanctioned to be with in the prudentialexposure normsIncome generating capacity of the project is sufficientto repay the loan and interestNo liquidity mismatches occurBanks should evolve an appropriate D:E Ratio for eachproject, consulting even the FI sBanks to decide the repayment period based on their

ALM.Banks should have requisite expertise to handle withparticular reference to risk analysis and sensitivityanalysis


51/51

Types of infrastructure financing

Finance through funds raised by way of subordinated debtsBy entering in to take out financing with IDFCor other FI sDirect financing through rupee term loans,DPG, FCLs

Investing in infrastructure bonds issued by theproject promoters/FI sInter institutional guarantees

chapter 1-credit policy

Documents