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Wednesday, October 31, 2001

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Credit policy

Sir,- Though Ministers and bureaucrats in Delhi are worried about the recession in the economy, there has been no effort to understand the problems of the industry and solve them. The Reserve Bank Governor has given absolute freedom to the banks so that the managements are accountable for performance.

However, the continuous reduction in the bank rate and the reserves in SLR were in order to give the industry the freedom of choice to fund their requirements from the markets or the banks. This may be true in the case of large corporate houses and multi- nationals but is not relevant for the medium and small sectors.

Perhaps, the Reserve Bank Governor is not aware that while the State Bank of India increased the interest rates on term loans effective from August 2000 consequent to the increase in bank rate it has not effected a cut following the bank rate reduction in the budget and subsequent reductions.

The loan lending rate still operates as high as 13 to 14 per cent for even clientele with a good performance record. The Reserve Bank Governor says that a margin of 4 per cent above the PLR will reflect the risk assessment but banks are charging much more which has resulted in medium and small industries cutting back on investments and reducing their funding requirements.

The current credit policy only promotes inefficiency in the banking system and provides for discriminatory attitude by the bank management. Under these circumstances there is no benefit from reducing interest rates as it certainly will not help economic development and will only provide another opportunity for the Government to borrow at lower interest rates.

D. Sudhakaran,

Chennai

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