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According to the Economic Survey 2004-05, the enactment of Fiscal Responsibility and Budget Management (FRBM) Act in 2003 and its operationalisation in 2004-05 is expected to give more flexibility to Reserve Bank of India (RBI) in formulation and management of monetary policy. The main challenges faced by RBI during the current year included a liquidity overhang of over Rs. 81,000 crore and an increase in inflation rate beyond about 5 per cent anticipated at the time of annual policy formulation. In its mid-term review in October 2004, RBI took steps to ensure provision of appropriate liquidity to meet credit growth and support investment and export demand in the economy while giving thrust to price stability.
The problem of liquidity overhang was tackled by RBI through Market Stabilisation Scheme (MSS) and Liquidity Adjustment Facility (LAF). The limit under MSS was raised from Rs. 60,000 crore to Rs. 80,000 crore in August 2004 after crossing the threshold limit of Rs. 50,000 crore. Liquidity absorption through MSS amounted to Rs. 59,499 crore as on January 28, 2005. In September 2004 after a review of the liquidity conditions the Cash Reserve Ratio (CRR) was raised in two stages by 50 basis points to 5 per cent. This resulted in the reduction of liquidity in the Banking system by over Rs. 9,000 crore. A noticeable development in the current year related to a significant increase in the flow of bank credit to the commercial sector while restricting market borrowing by the Central Government to a lower level. The government’s net market borrowings through issuance of dated securities were lower at Rs. 65,684 crore upto January 21, 2005. This included an amount of Rs. 25,000 crore raised under MSS as compared to Rs. 91,816 crore raised during the corresponding period in the previous year, reflecting pre-payment of high cost loans by States under the debt swap scheme.
The Survey says that there is increasing focus on the maintenance of financial stability in the context of better linkages between various segments of financial markets including money, government’s security and forex markets. Managing the capital flows has emerged as an important concern of monetary policy. The mid-term review of the annual policy statement of RBI for 2004-05 had revised its GDP growth projection from a range of 6.5 to 7 per cent to 6 to 6.5 per cent. Inflation projection on a point to point basis was raised upwards to 6.5 per cent from around 5 per cent projected earlier. The RBI in its annual policy statement has carried forward initiatives that are aimed at improving prudential regulation and credit delivery particularly to Agriculture and SSI sectors.
As regards financial performance, the Survey says that Banking sector witnessed strong growth in deposits and advances in 2003-04. Aggregate deposits of Scheduled Commercial Banks (SCBs) grew by 17.7 percent in 2003-04 compared to 13.4 per cent in 2002-03. Credit and investments by SCBs increased by 15.3 per cent and 25.1 per cent in 2003-04 compared to 16.1 per cent and 23.1 per cent in 2002-03 respectively. There was a significant decline in the Non-Performing Assets (NPAs) of SCBs in 2003-04, despite adoption of 90 day delinquency norm from March 31, 2004. In contrast with the decline of 25.9 per cent witnessed last year, food credit grew by 15.2 per cent in the current year (up to January 21, 2005). Growth of non-food credit as on the same date was 24.2 per cent as compared to increase of 11.9 per cent in the corresponding period of the previous year. In absolute terms incremental non-food credit amounted to Rs. 1,94,688 crore in the current year as compared to Rs. 80,573 crore the corresponding previous period.
In the current year (upto October 2004), gross bank credit increased by 12.5 per cent compared to 3.5 per cent in the same period of last year. Credit to real estate increased by 47.7 per cent in the current year upto October 2004 and that to housing increased by 30.9 per cent compared to 4.3 per cent and 19.8 per cent respectively in the same period last year. The credit flow to Agriculture sector from all formal sources amounted to Rs. 70,810 crore in 2002-03 and Rs. 86,981 crore in 2003-04, much below the levels envisaged in the Tenth Plan. As per a comprehensive policy announced by the Government on June 18, 2004, a 30 per cent increase in credit was envisaged to Agriculture sector in 2004-05 over an estimated credit flow of Rs. 80,000 crore in 2003-04. The implementation of the policy has been entrusted to Public and Private Sector Banks, Regional Rural Banks and Cooperative Banks.
The initiatives of Government and the RBI have started yielding results in terms of improvements in credit delivery. However, further efforts are required to sustain improvements in the credit flow to Agriculture sector and there is a need for banks to focus their efforts on commercial crops besides cereals, the Economic Survey maintains.
HB/SBK/VN
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