Monetary Policy Operations
Credit Delivery
Monetary Policy Stance for 2003-04

8.1 Monetary and Credit Policy for the year 2002-03 was formulated against the backdrop of comfortable liquidity conditions, a benign inflation environment and growing strength in the balance of payments and international reserves. The objective of revitalising investment demand dominated the conduct of monetary policy even while maintaining a continuous vigil on inflation. Accordingly, the policy stance remained accommodative with a commitment to ensure adequate liquidity to meet credit demand. A preference for softening of interest rates and greater flexibility in the interest rate structure in the medium-term was retained with changes in policy rates envisaged in response to the evolving liquidity and credit situation. Despite a modest recovery in industrial activity nurtured by the co-movement of non-food bank credit, the drastic shift in macroeconomic conditions due to the onset of the drought necessitated a pre-emptive easing in the monetary policy setting. Mitigating the deleterious effects of the drought on farm output and rural incomes emerged as a dominant concern. Amidst excess supply conditions in the financial markets, a decisive easing of monetary policy was signalled through cuts in the repo rate (June and October, 2002 and March 2003), in the Bank Rate (October, 2002) and in the CRR (June and November, 2002). Interest liabilities on farm loans were deferred and agricultural loans were rescheduled to provide a measure of financial relief to the drought affected areas. Improvements in the channels of bank credit flow to various sectors were facilitated by providing greater flexibility to banks in meeting allocations of lending to the priority sector, housing, the small scale sector, micro finance vehicles and rural infrastructure. Contending with large capital inflows engaged monetary policy throughout 2002-03. Efforts to sterilise the expansionary impact of the capital flows took the form of large open market sales and continuous repo operations under the LAF.

8.2 The October 2002 Mid-term Review maintained the stance of the Annual Policy Statement of April 2002 while revising the macroeconomic outlook in the context of the drought. It drew upon the softening of interest rates in the first half of the year to pursue the downward movement further on a sustainable basis. An important objective was to prevent resurgence of inflationary pressures on account of the policy stimulus to growth.

8.3 Since 1997, the Bank Rate has been reactivated as the principal signalling device of the monetary policy stance across the interest rate structure in consonance with inflationary expectations and the liquidity situation. The Bank Rate was reduced in stages to 6.25 per cent in October 2002, the lowest rate since May 1973, and by a further 25 basis points in April 2003. The Bank Rate has been reduced by 500 basis points in the last five years. This is the sharpest reduction in the Bank Rate since Independence (Table 8.1).

8.4 With the institution of the Liquidity Adjustment Facility (LAF), the repo rate has functioned as an informal floor for money market rates, providing a powerful signal to the market about the policy preference on interest rates. Ample liquidity conditions drove down money market rates frequently below the repo rate during 2002-03 prompting a 25 basis point reduction in the repo rate in June 2002, followed by another 25 basis point paring in October 2002 and a 50 basis point cut in March 2003. The repo rate has been adjusted downwards from 8.0 per cent in March 1999 to 5.0 per cent in March 2003. Repo and reverse repo rates are decided through daily auctions conducted without any pre-announced rate and bids are accepted on a multiple price basis. Since the institution of the LAF, repo rates have anchored money market rates during periods of ample liquidity with the reverse repo rate as anchor in periods of tightness (Table 8.2).

8.5 Banks have the freedom to fix interest rates on term deposits, with flexibility in offering interest rates as approved by their Boards. The only regulated rate is on savings deposit accounts with cheque facility. The reduction in administered interest rates on small savings announced in the Union Budget 2003-04 and moderate inflation enabled a 50 basis point reduction in the savings deposit rate to 3.5 per cent per annum from March 1, 2003.

8.6 Given the reductions in the policy rates and the significant softening of money market rates and gilt yields, banks were encouraged to popularise flexible deposit rate schemes for new deposits. In order to facilitate the conversion of fixed rate deposits into variable rate schemes, banks were advised to pay depositors at the contracted rate for the period of deposit already run and waive the penalty for premature withdrawal if the same deposit was renewed at the variable rate.

8.7 The downward rigidity in lending rates is reflected in spreads over the prime lending rates (PLRs). Unconscionably wide spreads are unwarranted in a period of low inflation. Moreover, they adversely impact the overall credit portfolio of banks and obscure the appropriate pricing of loans. In this context, banks were required to announce the maximum spread over the PLR for all advances except consumer credit. Information on maximum and minimum rates charged to borrowers is also required to be provided (Box VIII.1).

With the deregulation of lending rates since the early 1990s a striking characteristic of loan pricing behaviour among banks has been the wide dispersion in and around the Prime Lending Rates (PLRs). The resistance of banks to pass on some of the gains of a lower interest rate regime to borrowers has evoked concern in successive monetary policy statements since October 1996.

In the interest of customer protection and also to infuse healthy competition among banks under condition of full information/transparency, the Reserve Bank has institutionalised a system of collecting actual lending rates from scheduled commercial banks [excluding Regional Rural Banks (RRBs)] under a special quarterly return since June 2002. Information is sought on the range of the interest rates on rupee export credit as well as other types of bank credit. Banks are advised to ignore extreme values in the lending rates (up to 5 per cent of advances on either side) while submitting the information. Banks also furnish the range of interest rates in which there is concentration of loan contracts (say, 60 per cent or more) so as to obtain a sense of the general trend in lending rates. Consolidated information on actual lending rates for various bank-groups disseminated at the Reserve Bank's website reveals that only a few banks effected marginal reduction in the interest rate spreads on term loans on non-export credit. Furthermore, both PLRs and spreads varied widely across bank-groups during 2002-03. Efforts at ensuring information symmetry for the market has been reflected in a modest decline and convergence of spreads on export credit (Table).

8.8 Banks were encouraged to switch to the all cost concept of pricing loans by explicitly declaring processing charges and service charges. In order to enhance transparency, a benchmark PLR was advocated for banks, taking into account their actual cost of funds, operating expenses, a minimum margin to cover regulatory requirement of provisioning/ capital charge and the profit margin. Since all other lending rates can be determined with reference to the benchmark PLR, the system of tenor-linked PLR is to be discontinued. These initiatives are expected to bring flexibility to the interest rate structure in India and to align it with macroeconomic conditions (Box VIII.2).

8.9 With a view to encouraging competition among banks and also to increase flow of credit to the export sector, interest rates on rupee denominated export credit were liberalised. A ceiling rate on rupee export credit linked to the relevant tenor prime lending rate (PLR) was introduced, giving banks the freedom to charge rates below the prescribed rate from May 5, 2001. The ceiling interest rates on rupee export credit were reduced by one percentage point across the board, effective from September 26, 2001. The ceiling rate of PLR plus 0.5 percentage point on pre-shipment credit beyond 180 days and up to 270 days and post-shipment credit beyond 90 days and up to 180 days was deregulated with effect from May 1, 2003. In the period ahead, the ceiling rates on pre-shipment credit up to 180 days and post-shipment credit up to 90 days will also be deregulated to encourage greater competition among banks for export credit.

8.10 In April 2002, the ceiling rate on export credit in foreign currency was reduced to LIBOR plus 0.75 percentage points from LIBOR plus 1.00 percentage point with a view to improving export competitiveness. Exporters were encouraged to avail of foreign currency loans. Banks were allowed to use borrowed foreign currency funds as well as foreign currency funds generated through buy-sell swaps in the domestic foreign exchange market for extending foreign currency denominated loans to exporters (Table 8.3).

8.11 Interest rates on foreign currency repatriable deposits under the FCNR(B) scheme are adjusted from time to time in alignment with movements in international interest rates as well as to slow down exceptionally large inflows under these accounts. In April 2002, the ceiling rates on FCNR(B) deposits were revised downwards from LIBOR to LIBOR/SWAP rates of corresponding maturities minus 25 basis points. In April 2003, the minimum maturity period of fresh NRE deposits was raised from 6 months to 1 year in alignment with the maturity structure of FCNR(B) deposits. Effective July 17, 2003, the interest rates on fresh NRE deposits for one to three years should not exceed 250 basis points above the LIBOR/ SWAP rates for US dollar of corresponding maturity. This was done to provide consistency in interest rates offered to NRIs

8.12 The cash reserve ratio (CRR) remains an important instrument for modulating liquidity conditions. The medium-term objective is, however, to reduce CRR to the statutory minimum level of 3.0 per cent. Accordingly, on a review of developments in the international and domestic financial markets, a 75 basis point reduction in the CRR during June to November, 2002 was followed by a further 25 basis points cut from June 14, 2003 taking the level of the CRR down to 4.5 per cent. The minimum daily maintenance of CRR was raised to 80 per cent of the average daily requirement for all the days of the reporting fortnight with effect from the fortnight beginning November 16, 2002. This was subsequently lowered to 70 per cent with effect from the fortnight beginning December 28, 2002. The payment of interest on eligible CRR balances maintained by banks was changed from quarterly basis to monthly basis from April 2003. The CRR has been almost halved since April 2000 resulting in cumulative release of first round resources of over Rs.33,500 crore (Table 8.4).

8.13 The statutory liquidity ratio (SLR) to be maintained by all scheduled commercial banks remains unchanged at a minimum of 25 per cent of net demand and time liabilities (NDTL) since October 1997. As a prudential measure to strengthen the urban co-operative banks (UCBs), the proportion of SLR holding in the form of government and other approved securities to NDTL has been increased in a phased manner. From April 1, 2003, all scheduled UCBs have to maintain the entire SLR holdings of 25 per cent of NDTL in government and other approved securities only. Similarly, regional rural banks (RRBs) were required to maintain their entire SLR holdings in government and other approved securities by March 31, 2003 with SLR holdings of RRBs in the form of deposits with sponsor banks maturing beyond March 31, 2003 being reckoned for the SLR till maturity. The maturity proceeds of such deposits would have to be converted into government securities for RRBs not reaching the 25 per cent minimum level of SLR in Government securities by that time.

8.14 The medium-term objective of monetary policy is to move away from sector-specific refinance facility. Of the two standing facilities, viz., export credit refinance (ECR) and collateralised lending facility (CLF) available to scheduled banks from the Reserve Bank, the latter was withdrawn with effect from October 5, 2002. ECR is provided on the basis of banks' eligible outstanding rupee export credit, both at the pre-shipment and post-shipment stages. From April 1, 2002, ECR is provided to scheduled banks to the extent of 15 per cent of the outstanding export credit eligible for refinance at the end of the second preceding fortnight. Apportionment of normal and back-stop facilities was changed from the initial ratio of 67:33 to 50:50 from November 16, 2002. Although refinance entitlements declined during the year, this did not impact on market liquidity as utilisation of standing facilities remained very low.

8.15 The methodology for fixation of the rate for the back-stop facility was rationalised with effect from April 30, 2003. Accordingly, the back-stop interest rate is at the reverse repo cut-off rate at which funds were injected earlier during the day in the regular LAF auctions. Where no reverse repo bid is accepted, the back-stop interest rate would generally be 2.0 percentage points over the LAF repo rate of the day. On the days when no bids for repo or reverse repo auctions are received/accepted, the back-stop interest rate would be decided by the Reserve Bank on an ad hoc basis.

8.16 In a specific situation of a financially sound bank facing sudden liquidity problems, particularly outside the normal LAF auction timings and on days when auctions are not held, the Reserve Bank at its discretion, may extend temporary liquidity support at an interest rate 4.0 percentage points above the reverse repo rate prevailing on that day (or a rate as may be decided by the Reserve Bank), against eligible securities with adequate margin and other appropriate conditions. On April 12, 2003 the Reserve Bank extended a temporary special collateralised liquidity facility of Rs.809 crore under section 17(4)(a) of RBI Act, 1934 against the collateral of excess SLR securities with a margin of 10 per cent for four days to a particular bank to tide over temporary liquidity problems on account of adverse market sentiments and sudden withdrawal of large deposits. The amount was repaid on April 16, 2003.

8.17 The Liquidity Adjustment Facility (LAF), introduced in June 2000, has evolved as a flexible instrument to modulate short-term liquidity and to ensure stable conditions in the overnight/call money market. The LAF operates through repo and reverse repo auctions, thereby setting a corridor for the short-term interest rates that is consistent with monetary policy objectives. Changes in procedures of the LAF have been effected to improve operational efficiency and to move gradually from a system of segmented refinance to a more fungible system of liquidity adjustment at market related rates (Box VIII.3).

8.18 The LAF was actively used during 2002-03 to manage the injections of liquidity due to large capital inflows. Easy liquidity conditions in the market were reflected in the large repo bids received. The average daily repo bid amount received at overnight repo auctions was significantly higher at Rs.10,315 crore as against only Rs.162 crore for reverse repos (Chart VIII.1).

8.19 Comfortable liquidity conditions at the beginning of 2002-03 elicited substantial repo bids which, however, declined in May. The Reserve Bank responded by announcing the advancement of the CRR cut by a fortnight to June 1, 2002 which helped remove liquidity concerns and improved market sentiment. This was accompanied by private placements of government securities with the Reserve Bank, assuaging market pressures. Call rates remained a shade above the repo rate for most of June 2002. They, however, touched sub-repo levels during the last week of the month. The reduction in the repo rate on June 27, 2002 buoyed up market sentiment.

8.20 Repo bidding was heavy during July-October 2002 but the Reserve Bank accepted these bids only partially in most of the auctions (Table 8.5). Repo volumes came down in November-December due to sterilisation operations. The call rate continued to hover around the repo rate till about the middle of December.

8.21 Liquidity tightened from mid-December due to investment of Centre's surplus in its own securities (which would have otherwise flowed into the financial markets). Two successive tranches of tap issues of State loans in February-March, 2003 and advance tax outflows put further pressure on market liquidity. Average repo amounts accepted were correspondingly lower during January-March 2003. The repo rate cut on March 3, 2003 improved liquidity. Due to ample liquidity in the system during June-November 2002, the 14-day repo bids were relatively large but dried up from December 2002 onwards when liquidity tightened (Table 8.6).

8.22 Net open market sales (including sales to State Governments for investment of durable surplus/ reinvestment of maturity proceeds, investments in Consolidated Sinking Fund and Guarantee Redemption Fund) were higher during 2002-03 than in the previous year and in excess of the Reserve Bank's net subscription to primary issuance of government securities by Rs.17,605 crore. During April 2002, two OMO auctions for an aggregate amount of Rs.5,280 crore were conducted to stem the sharp fall in yields as well as to absorb liquidity from the system. The OMO sales of May 31-June 1, 2002 were conducted to neutralise the impact of the CRR cut of 50 basis points on June 1, 2002. OMO sales were undertaken during July and August, 2002 for sterilisation operations consequent to large inflows of foreign capital. Large OMO sales continued during November 2002-January 2003 to absorb excess market liquidity (Table 8.7). In the current year, an OMO sale was conducted on May 29, 2003, for an amount of Rs.5,367 crore to absorb the excess liquidity in the system. Further, an amount of Rs.11,470 crore was absorbed through OMO sale on August 14, 2003.

8.23 In order to ensure that a sufficient stock of marketable securities would be available in the portfolio of the Reserve Bank for conducting OMO from time to time, the Government of India converted Rs.40,000 crore of 4.6 per cent Special Securities issued earlier to the Reserve Bank into marketable securities of various maturities (3 years to 18 years) at the prevailing yields. Further, on June 12, 2003 the Government of India converted Rs.20,000 crore of Government of India Treasury Bills (Conversion) Special Securities held by the Reserve Bank into dated securities, viz., 5.48 per cent Government Stock 2009, 6.05 per cent Government Stock 2019 and 6.17 per cent Government Stock 2023 for notified amounts of Rs.5,000 crore, Rs.7,000 crore and Rs.8,000 crore, respectively (Table 8.8).

8.24 Socio-economic objectives have governed the design of credit policies in India consistent with the imperatives for a vibrant and viable banking system. An important and abiding goal of monetary policy is to improve the credit delivery mechanism by simplifying procedures, encouraging decentralised decision making and enhancing competition. Increasing the functional freedom of banks has had beneficial effects in channelising bank credit to the priority sector and in particular to agriculture, small business, weaker sections and SSI. The rural credit system, specifically, has been the focus of policy.

8.25 Several measures were put in place to improve the credit delivery mechanism in the priority sector: (i) the limit on advances granted to dealers in drip irrigation/sprinkler irrigation system/ agricultural machinery, irrespective of their location, was increased from Rs.10 lakh to Rs.20 lakh under priority sector lending for agriculture; (ii) the existing overall limit of Rs.10 lakh in respect of small business was increased to Rs.20 lakh without any ceiling for working capital in order to augment credit flow to small business; (iii) the individual credit limit to artisans, village and cottage industries was increased to Rs.50,000 from the existing limit of Rs.25,000; (iv) loans to the Agri-Clinics and Agribusiness centres were included under the priority sector as ‘direct finance’ to agriculture; (v) para-banking activities such as leasing and hire purchase financing undertaken departmentally by banks were also classified as priority sector advances, provided the beneficiaries satisfy priority sector norms; (vi) the limit for direct housing finance was increased from Rs.5 lakh to Rs.10 lakh in rural and semi-urban areas.

8.26 Public sector banks, private sector banks and foreign banks as groups achieved the overall target, for priority sector lending (Table 8.9). The large increase in private banks' priority sector credit was primarily on account of two banks.

8.27 The Statement on Monetary and Credit Policy for 2002-03 recognised the growing importance of the housing sector and its forward and backward linkages with other sectors of the economy. Banks were encouraged to increase the flow of credit to this sector. Banks were advised to allocate a minimum of 3.0 per cent of incremental deposits for housing. Moreover, the term loans extended by banks to intermediary agencies against the loans sanctioned by them were allowed to be reckoned as part of housing finance. Also, investment in bonds issued by HUDCO and the NHB exclusively for financing of housing is reckoned for priority sector targets.

8.28 Prudential requirements for housing finance by banks and investment by banks in securitised debt instruments of housing finance companies (HFCs) were liberalised to improve the flow of credit to the housing sector. Residential housing properties now attract a risk weight of 50 per cent as against 100 per cent stipulated earlier. A risk weight of 50 per cent was also assigned for the purpose of capital adequacy for investments in Mortgage-Backed Securities (MBS) of residential assets of HFCs supervised by the National Housing Bank (NHB). Such investments by banks are reckoned for inclusion in the prescribed housing finance allocation of 3.0 per cent. For the financial year 2002-03, each bank was required to compute its share of the housing finance allocation at 3.0 per cent of incremental deposits as on the last reporting Friday of March 2002 over the corresponding figure on the last reporting Friday of March 2001. In April 2003, banks were allowed to extend direct finance to the housing sector up to Rs.10 lakh to individuals in rural and semi-urban areas as part of priority sector lending. Banks had already been allowed to include loans upto Rs.10 lakh to individuals in urban/metropolitan centres for construction of houses as part of priority sector lending.

8.29 In India, the housing sector has assumed importance in recent years both on account of its growth generating potential in the context of investment demand and in view of the acute shortage of housing facilities in the country. Several fiscal incentives have been provided to boost housing demand (Box VIII.4).

8.30 Micro-credit institutions and Self Help Groups (SHGs) are important vehicles for credit delivery to self-employed persons, particularly, women in rural and semi-urban areas. Issues relating to structure and sustainability, funding, regulations and capacity building for micro-credit delivery are engaging attention of the Reserve Bank. The objective has been to accelerate the flow of bank credit to micro-finance institutions while maintaining their decentralised, voluntary and non-bureaucratic character, particularly in rural and semi-urban areas. Considering the high recovery rate in respect of banks' advances to SHGs, unsecured advances given by banks to SHGs against group guarantees are currently excluded for the purpose of computation of the prudential norms on unsecured guarantees and advances.

8.31 With a view to facilitating smoother and more meaningful banking with the poor, a pilot project for purveying micro credit by linking Self-Help Groups (SHGs) with banks was launched by the NABARD in 1991-92. The scheme has since been extended to RRBs and co-operative banks. The number of SHGs linked to banks aggregated 7,17,360 as on March 31, 2003 with almost 40 per cent concentrated in Andhra Pradesh (Box VIII.5). This translated into an estimated 11.6 million very poor families brought within the fold of formal banking services. More than 90 per cent of the groups linked with banks are exclusive women groups and the scheme has more than 95 per cent on-time repayment record. Cumulative disbursement of bank loans to these SHGs stood at Rs.2,049 crore as on March 31, 2003, with an average loan of Rs.28,560 per SHG and Rs.1,766 per family. There are, at present, 48 commercial banks, 192 RRBs and 264 co-operative banks associated with the SHG-bank linkage programme. This programme presently covers 523 districts across the country with the total number of participating NGOs and other agencies currently involved in this linkage being 2,800 (Table 8.10).

8.32 The share of outstanding agricultural advances of public sector and private sector banks in bank credit has remained stable in the recent years, with the share of private sector banks showing an increase at the end of March 2003 as a result of rise in agricultural advances of some of the new generation private sector banks (Table 8.11).

8.33 Since 1994-95, public sector banks prepare Special Agricultural Credit Plans (SACP) on an annual basis. During 2002-03, the disbursements to agriculture under these Plans were Rs.33,921 crore against a projection of Rs.36,838 crore. In the recent period, policy interventions for building institutional delivery mechanisms for credit to agriculture have been supplemented by location specific innovations which involve private sector initiatives (Box VIII.6).

8.34 The recovery of direct agricultural advances of public sector banks continue to remain stable; however, the percentage of recovery improved as at the end of June 2002 (Table 8.12).

8.35 Failure of the South-West monsoon resulted in shortage of rainfall in the sowing month of July 2002. Moreover, nearly 60 per cent of meteorological sub-divisions in the country received deficient/scanty rainfall. The adverse impact of the drought on the kharif crops hampered the loan repaying capacity of the farmers. They were not only unable to service their debts but also needed further loans during the season. In order to provide relief to the affected farmers, guidelines for relief measures by banks in the districts notified by the State Governments as drought affected were issued in November 2002. Banks were advised not to recover any amount either by way of principal or interest during the year 2002-03 in respect of Kharif crop loans. The principal amount of crop loans was converted into term loans to be recovered over a minimum period of five years in the case of small and marginal farmers and four years in the case of other farmers. Interest due on crop loans was allowed to be deferred with no charged interest on the deferred interest. As a one-time measure, the first year's deferred interest liability on Kharif loans was waived completely.

8.36 Pursuant to the announcement made in the Union Budget for the year 2002-03, banks were advised to issue Kisan Credit Cards (KCCs) to cover all eligible borrowers in the agricultural sector by March 2004. Public sector banks issued 10.1 million KCCs up to March 31, 2003. As announcement in the Union Budget 2001-02, banks are required to provide a personal insurance package to the KCC holders to cover them against accidental death or permanent disability up to a maximum amount of Rs.50,000 and Rs.25,000, respectively. The premium burden for this was to be shared by the card issuing institution(s) and the Kisan Credit Card holder(s) in a ratio of 2:1. The personal insurance package linked to KCCs was operationalised in July 2001.

8.37 The Reserve Bank has commissioned the National Council of Applied Economic Research (NCAER) to conduct a survey for assessing the effectiveness, coverage, weaknesses, and impact of the KCC Scheme. The impact assessment survey would cover all regions and would recommend appropriate policy actions to strengthen the scheme.

8.38 Both public sector and private sector banks, having shortfalls in lending to priority sector/ agriculture are allocated shares for contribution to the RIDF established with the NABARD for assisting State Governments/State-owned corporations in quick completion of on-going projects relating to medium and minor irrigation, soil conservation, watershed management and other forms of rural infrastructure. The IXth tranche of RIDF has been established with a corpus of Rs.5,500 crore.

8.39 In the case of RIDF-I to VI, the rate of interest on deposits placed in the Fund was uniform for all the banks irrespective of the extent of their shortfall. Effective RIDF VII, the rate of interest on RIDF deposits is linked to the banks' performance in lending to agriculture. Accordingly, banks receive interest at rates inversely proportional to their shortfall in agricultural lending.

8.40 Public sector banks were advised to earmark 5 per cent of their net bank credit as credit to women by the end of March 2004. At the end of March 2003, the aggregate proportion of credit to women in the portfolio of public sector banks stood at 3.9 per cent of net bank credit.

8.41 At the end of March 2002, the outstanding scheduled commercial banks' credit to sick SSIs numbering 1,77,336 was Rs.4,819 crore. Of these units, 4,493 units were found to be viable and their outstanding bank credit amounted to Rs.416 crore. There were 1,67,574 non-viable units with outstanding bank credit of Rs.4,147 crore. Banks placed 621 units involving outstanding credit of Rs.89 crore under nursing programmes.

8.42 The total credit provided by public sector banks to small-scale industries (SSI) at the end of March 2003 was Rs.52,988 crore which formed 11.1 per cent of net bank credit and 26.1 per cent of the total priority sector advances of these banks. Out of these advances to SSI units, advances to cottage industries, artisans and tiny industries were Rs.26,939 crore, constituting 50.8 per cent of the advances to the SSI sector.

8.43 Public sector banks were advised to operationalise at least one specialised SSI branch in every district and centre having cluster of SSI units. At the end of March 2003, 417 specialised SSI bank branches were operationalised by the banks.

8.44 A consortium of select public sector banks was formed with the State Bank of India as the leader of the consortium to provide credit to the Khadi and Village Industries Commission (KVIC) under the consortium scheme of Rs.1,000 crore. These loans are provided at 1.5 per cent below the average prime lending rates of five major banks in the consortium. At the end of June 2003, an amount of Rs.357 crore was outstanding out of Rs.738 crore disbursed by the consortium under the scheme.

8.45 The total number of Swarozgaris assisted under the Swarnajayanti Gram Swarozgar Yojana (SGSY) during 2002-03 (up to February 2003) was 5,35,133. Bank credit amounting to Rs.781 crore and Government subsidy amounting to Rs.405 crore were disbursed under this scheme. Of the Swarozgaris assisted, 1,60,638 (30.0 per cent) were scheduled castes, 78,157 (14.6 per cent) were scheduled tribes, 2,57,664 (48.2 per cent) were women and 4,166 (0.8 per cent) were physically handicapped. The investment per family was Rs.22,169. Under the Swarna Jayanti Shahari Rozgar Yojana (SJSRY), a total of 16,628 applications were sanctioned during 2002-03, with disbursements amounting to Rs.41.7 crore made in 11,756 cases up to September 2002. The total number of applications sanctioned under the Scheme of Liberation and Rehabilitation of Scavengers (SLRS) during 2002-03 was 5,109. Out of this, disbursements amounted to Rs.7.3 crore in 4,253 cases as on December 31, 2002. Under the Prime Minister's Rozgar Yojana (PMRY), the number of applications sanctioned during 2002-03 was 2,26,572 involving an aggregate sanctioned amount of Rs.1,461 crore.

8.46 The outstanding advances of public sector banks under the DRI Scheme at the end of March 2003 amounted to Rs.300 crore in 3.7 lakh borrowal accounts, forming 0.1 per cent of the total advances outstanding as at the end of the previous year, which is substantially less than the target of 1.0 per cent.

8.47 The working of the Local Area banks (LAB) was reviewed during 2002-03 (Table 8.13). Attention was drawn to the weakness in the concept of the LAB model, particularly its size, capital base, inherent inability to absorb the losses which are bound to arise in the course of business, risk prone credit portfolio, inability to diversify and derisk the business model in view of size and location. It has been decided not to issue fresh licenses for establishment of LABs.

8.48 The Banking Ombudsman Scheme, 1995 was announced in June 1995 under Section 35A of Banking Regulation Act, for expeditious and inexpensive settlement of customer complaints about the deficiencies in banking services. All commercial banks having business in India (except RRBs) and scheduled primary co-operative banks were covered under the scheme. The scheme has since been reviewed and notified in June 2002 as Banking Ombudsman Scheme, 2002. The revised scheme includes provision for establishment of a Review Mechanism, enlarging the ambit of the scheme to include RRBs and entrusting the work of arbitration involving amounts up to Rs.10.0 lakh to the Banking Ombudsman. The number of complaints received in the various Banking Ombudsman offices across the country during 2002-03 declined to 6,506 as compared with 7,022 in the previous year. The complaints pertained to collection of negotiable instruments, operation of deposit account and claim in respect of fraudulent withdrawals. During 2002-03, 2,132 complaints were rejected after scrutiny, 2,995 complaints were withdrawn/settled through conciliation, 36 complaints were settled by recommendations and awards were given in respect of 47 complaints.

8.49 Credit limits are authorised to the Food Corporation of India (FCI), State Governments and Union Territory authorities for procurement of foodgrains, to National Agricultural Co-operative Marketing Federation (NAFED) for procurement of pulses and oilseeds, and to the Jute Corporation of India (JCI) for raw jute procurement. The food credit provided under the consortium arrangement covers mainly rice/paddy and wheat. Procurement of coarse grains such as jowar, bajra, ragi, barley and maize is also covered at the specific instance of State Governments. In view of its size and national priority, food credit is taken as the first charge on the lendable resources of the banks and is made available without stipulation of any margin. The rate of interest charged is equal to the average of Prime Lending Rates (PLRs) of five major banks in the Food Consortium. The consortium arrangement is regulated by the Reserve Bank with regard to entry/exit of banks into/from the consortium, authorisation of food credit limits for procurement purposes, fixing percentage/shares of member banks in the consortium and the interest rate charged on food credit.

8.50 The credit limits authorised for food procurement are disbursed by a consortium of 61 banks (State Bank of India (SBI), 7 Associate Banks of SBI, 19 other public sector banks, 14 private sector banks and 20 state co-operative banks) through the consortium leader, under a 'single window' system. The share of each bank is ordinarily determined by the Reserve Bank on the basis of its share in the fortnightly average aggregate deposits of all member banks, during the preceding financial year. The rate of interest charged is 11.05 per cent (effective January 1, 2003).

8.51 With the onset of the kharif/rabi season, State Governments and Union Territory Authorities provide cash flow statements indicating the projections/ estimates of the production, procurement and marketable surplus. Based on these estimates, credit limits to banks are authorised taking into account the Minimum Support Price (MSP) fixed by the Government as also the admissible costs of procurement such as mandi charges, statutory taxes, loading/unloading charges and transportation charges up to the point of storage. The outstandings in the food credit accounts are always required to be covered by the stocks valued at the lower of the procurement cost or issue price (Table 8.14).