With Inflation at its peak, RBI (Reserve Bank of India) announced its Hawkish Credit Policy for 2011-12 on 03rd May, 2011, Tuesday. The important announcements made in the policy are:
1 1. The reverse repo rate will be pegged at a fixed 100 basis points below the repo rate. Hence, the reverse repo rate will no longer be an independent variable.
2 2. RBI will be instituting a new Marginal Standing Facility (MSF). Banks can borrow overnight from the MSF up to one per cent of their respective net demand and time liabilities or NDTL. The rate of interest on amounts accessed from this facility will be 100 basis points above the repo rate.
3 3. As per the above scheme, the revised corridor will have a fixed width of 200 basis points. The repo rate will be in the middle. The reverse repo rate will be 100 basis points below it, and the MSF rate 100 basis points above it.
4 4. The repo rate under the liquidity adjustment facility (LAF) has been increased by 50 basis points. Accordingly, it goes up from 6.75 per cent to 7.25 per cent.
5 5. The reverse repo rate under the LAF, determined with a 100 basis point spread below the repo rate, will stand adjusted at 6.25 per cent.
6.6.. The Marginal Standing Facility (MSF) rate, determined with a spread of 100 basis points above the repo rate, gets calibrated at 8.25 per cent.
7.7. Increased the savings bank deposit interest rate from the present 3.5 per cent to 4.0 per cent with immediate effect.
88. FIIs will be allowed to cancel and rebook up to 10 per cent of the market value of the portfolio as at the beginning of the financial year.
9.9. The provisioning requirements on certain categories of non-performing advances and restructured advances will be enhanced.
1 10. Investment by banks in liquid schemes of debt oriented mutual funds will be subject to a prudential cap of 10 per cent of their net worth as on March 31 of the previous year.
Other than all the above measures, The Reserve Bank of India has capped interest rates charged by micro finance institutions from small borrowers at 26 per cent, but opened for MFIs the bank credit line which was curtailed following the crisis faced by the sector in October, 2010.
The Impact of Various Measures adopted in the Credit Policy:
The loan by the banks to MFIs for on-lending to small borrowers will fall under 'priority sector' category if the RBI guidelines (which are to be issued soon) are met.
The RBI has fixed the loan amount for an individual borrower at Rs 35,000 from an MFI.
The bank loans to all MFIs including NBFCs working as MFIs on or after April 1, 2011, will be eligible for classification as priority sector loans.
The central bank said the loans could be disbursed to rural families with an annual income of Rs 60,000 or urban and semi-urban households with income up to Rs 120,000.
The RBI, however, left it to the borrowers to decide on the repayment period either weekly, fortnightly or monthly.
It has also asked the MFIs to ensure that 75 per cent of the loan extended is utilized by the borrowers for income generation purpose.
The RBI has also decided to appoint a committee to review the priority sector lending classification and suggest revised guidelines on it.
Home, auto and other loans are set to become costlier with the Reserve Bank hiking key short-term rates to contain inflation, while giving relief to small savers by increasing the savings bank rate to 4% from 3.5% now.
The signal was given by the RBI in its annual policy review meeting for 2011-12, where it hiked the repo rate (the rate at which banks borrow from the RBI) by 50 basis points to 7.25%, the ninth increase since March, 2010.
RBI has pegged the Growth Rate at a lower level of 8% for 2011-12 as against the government's projection of 9%.
The move to hike the rates has been necessitated as the RBI feels inflation would remain at an "elevated level" of 9 per cent in the first half of the current financial year before moderating to 6 per cent by March, 2012.
This hawkish monetary stand will make the investment environment even more difficult.
RBI listed risks to the economy in the annual credit policy speech. They include sovereign debt problems in the euro-zone, high commodity prices, especially of oil, and accentuation of inflationary pressure in the emerging market economies.
Recent political turmoil in Egypt and Tunisia, followed by the ongoing civil war in Libya, a major oil exporter and OPEC member, have pushed up global crude prices.
Banks are most likely to raise their lending rates, following the Reserve Bank of India’s decision to raise savings deposit rate by 50 basis points to 4%. Savings deposits are the cheapest source of funds for any bank, and the RBI move will pinch their net interest margins.
Recent political turmoil in Egypt and Tunisia, followed by the ongoing civil war in Libya, a major oil exporter and OPEC member, have pushed up global crude prices.
Banks are most likely to raise their lending rates, following the Reserve Bank of India’s decision to raise savings deposit rate by 50 basis points to 4%. Savings deposits are the cheapest source of funds for any bank, and the RBI move will pinch their net interest margins.
Cost of funds would go up by 5-15 basis points across the industry.
Banks across the industry could see a cumulative reduction of Rs 5,500 crore in profits due to the hike in saving rate.
The higher lending rates would make loans dearer for both new and existing auto, home and corporate borrowers.
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