THE ANNUAL REPORT ON THE WORKING OF THE RESERVE BANK OF INDIA

PART TWO : THE WORKING AND OPERATIONS OF

THE RESERVE BANK OF INDIA

MONETARY AND CREDIT POLICY

VIII OPERATIONS

8.1 The conduct of monetary policy during 2003-04 of bank loans. The Section also presents the policy
was guided by the objective of provision of adequate initiatives undertaken by the Reserve Bank during the
liquidity to meet credit growth and support investment year to strengthen the credit delivery system.
demand in the economy while continuing a vigil on
movements in the price level. Ensuring macroeconomic MONETARY POLICY OPERATIONS
stability was a concurrent objective with intensified
monitoring of price movements, in view of the hardening Monetary Measures
of international commodity prices, especially crude oil, Bank Rate
and the likely impact of the liquidity overhang in the
system. Strong capital inflows posed a challenge for 8.3 The Bank Rate was reduced by 25 basis points
monetary management. The Reserve Bank responded (bps) to 6.0 per cent effective April 30, 2003 – the
with a policy mix of sterilisation, prepayment of external lowest level since May 1973 (Chart VIII.1).
debt and liberalisation of foreign exchange transactions
to maintain monetary conditions in line with the overall
Chart VIII.1 : Bank Rate
objectives. The need to fortify monetary management
with additional instruments of sterilisation in the South East
context of the large volume of capital inflows led to Asian Crisis
BoP
the institution of a Market Stabilisation Scheme (MSS). Crisis
Interest rates on non-resident deposits were gradually 14
Oil Oil
aligned with those prevailing in the international markets 12 Crisis Crisis
Capital
in view of the rapid expansion in banks’ external Outflows
liabilities. These measures were reinforced by 10
refinements in the Liquidity Adjustment Facility (LAF)
Per cent

8
scheme to strengthen the operating procedure of
monetary policy. The Reserve Bank undertook parallel 6
Reactivated
initiatives to improve the credit delivery system, Bank Rate
4
especially in respect of agriculture and small and
medium enterprises (SMEs). 2

8.2 This Section surveys the Reserve Bank’s 0

monetary and credit policy operations during 2003-04.
Apr-71
Oct-72
Apr-74
Oct-75
Apr-77
Oct-78
Apr-80
Oct-81
Apr-83
Oct-84
Apr-86
Oct-87
Apr-89
Oct-90
Apr-92
Oct-93
Apr-95
Oct-96
Apr-98
Oct-99
Apr-01
Oct-02
Apr-04

A review of monetary policy operations sets out the

dilemmas posed by the evolving monetary conditions.
It also delineates the strategy adopted to balance the
stance in support of growth against the need to ensure
orderly conditions in financial markets and to contain Repo Rate
potential inflationary pressures from persistent capital 8.4 The repo/reverse repo rates in the auctions
inflows and rising international oil and commodity under the LAF signal the Reserve Bank’s monetary
prices. A review of interest rate policy profiles the policy stance. The Reserve Bank reduced the repo
measures undertaken to impart flexibility to the interest rate by 50 bps to 4.5 per cent effective August 25,
rate structure and to enhance transparency in the pricing 2003 (Table 8.1).

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 MONETARY AND CREDIT POLICY OPERATIONS

Table 8.1: Movement in LAF Rates

(Per cent)

Month 2003-04 2002-03 2001-02 2000-01

Repo Reverse Repo Reverse Repo Reverse Repo Reverse
Repo Repo Repo Repo
1 2 3 4 5 6 7 8 9
April 5.0 7.0 6.0 – 6.75-7.0 8.75-9.00
May 5.0 7.0 6.0 8.0 6.5-6.75 8.75
June 5.0 – 5.75 – 6.5 8.5 – 9.0-14.0
(June 27)
July 5.0 7.0 5.75 – 6.5 8.5 7.0-8.0 9.0-10.0
August 4.5 – 5.75 – 6.5 – 8.0-15.0 15.0-16.0
(August 25)
September 4.5 – 5.75 – 6.5 8.5 10.0-13.0 13.5
October 4.5 – 5.50 – 6.5 8.5 8.0-9.75 10.25
(Oct. 30)
November 4.5 – 5.50 7.5 6.5 8.5 8.0 10.0
(Nov. 12)
December 4.5 – 5.50 – 6.5 8.5 8.0 10.0
January 4.5 – 5.50 7.5 6.5 – – 10.0
February 4.5 – 5.50 7.5 6.5 8.5 7.5-8.0 10.0
March 4.5 6.0 5.0 7.0 6.0 8.0 7.0-7.5 9.0
(March 29) (March 3) (March 5)

– : No repo/reverse repos.

8.5 The scope of the LAF was progressively fixed rate repo auctions were reintroduced in March
enlarged to price primary liquidity at the reverse repo 2004. Also, the maturity period of repos was increased
rate. Effective the fortnight beginning December 27, to 7 days, while for reverse repos it was retained on
2003 the ratio of the “normal” standing facility available overnight basis. Furthermore, the spread between the
at the Bank Rate and the “back-stop” standing facility repo rate and the reverse repo rate was reduced by
linked to the reverse repo rate was modified to one- 50 bps to 150 bps with effect from March 29, 2004.
third and two-third (i.e., ratio of 1:2) from one-half each At the time of introduction of the revised LAF scheme,
(i.e., ratio of 1:1). The entire quantum of export credit it was indicated that the Reserve Bank will continue
refinance and the liquidity support available for to have the discretion to conduct overnight or longer-
primary dealers was made available at a single rate, term repo auctions at fixed or variable rates depending
i.e. , the reverse repo rate, effective March 29, 2004. on market conditions and other relevant factors.
Accordingly, on an assessment of the prevailing
8.6 Cross-country experience suggests that
situation, the Reserve Bank decided to reintroduce
central banks influence short-term interest rates by
overnight fixed rate repos at 4.5 per cent under the
directly fixing the interest rate on central bank
LAF from August 16, 2004 while continuing with 7-
accommodation and indirectly by open market
operations (OMO) which, in turn, affect the price of day and 14-day repos and overnight fixed rate reverse
primary liquidity. The Reserve Bank has adopted a repos.
balanced and flexible stance in this regard in recent
years in response to the evolving situation. Fixed repo Cash Reserve Ratio
rate auctions, introduced in November 1997, were
8.7 The Reserve Bank continued to pursue its
replaced in June 2000 with auctions under the LAF,
medium-term objective of reducing the cash reserve
in which interest rates emerged from the market bids.
In effect, however, the LAF turned out to be a de facto ratio (CRR) to the statutory minimum level of 3.0 per
fixed rate auction as market participants did not cent of banks’ net demand and time liabilities (NDTL).
usually bid at a price different from the prevailing repo In line with this policy stance, there was a cut in the
rate. In order to provide a clearer signal to the market, CRR by 25 bps on June 14, 2003 (Table 8.2).

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 ANNUAL REPORT

Table 8.2: Cash Reserve Ratio

(Amount in Rupees crore)

Month 2003-04 2002-03 2001-02 2000-01

CRR Amount* CRR Amount* CRR Amount* CRR Amount*
(Per cent) (Per cent) (Per cent) (Per cent)
1 2 3 4 5 6 7 8 9
April 4.75 0 5.5 0 8.0 0 8.0 7,200
May 4.75 0 5.5 0 7.5 4,500 8.0 0
June 4.5 3,500 5.0 6,500 7.5 0 8.0 0
July 4.5 0 5.0 0 7.5 0 8.25 -1,900
August 4.5 0 5.0 0 7.5 0 8.5 -1,900
September 4.5 0 5.0 0 7.5 0 8.5 0
October 4.5 0 5.0 0 7.5 0 8.5 0
November 4.5 0 4.75 3,500 5.75 6,000 8.5 0
December 4.5 0 4.75 0 5.5 2,000 8.5 0
January 4.5 0 4.75 0 5.5 0 8.5 0
February 4.5 0 4.75 0 5.5 0 8.25 2,050
March 4.5 0 4.75 0 5.5 0 8.0 2,050
* : Amount stands for first round release (+)/ impounding (-) of resources through changes in the cash reserve ratio.

Eligible CRR balances maintained by banks with the the instrument of day-to-day liquidity management
Reserve Bank are paid interest on a monthly basis with the absorption of liquidity of an enduring nature.
starting from April 2003. 8.10 The scope of sterilisation operations is
circumscribed by the Reserve Bank of India Act, 1934
Liquidity Management for three reasons. First, the Reserve Bank is not allowed
8.8 The Reserve Bank continued to modulate to borrow beyond its paid-up capital of Rs.5 crore without
market liquidity through a mix of repo operations under collateral. This requires Government securities to be
the LAF and outright OMO. Barring fluctuations furnished as underlying collateral in repo operations
relating to primary auctions and the usual year-end under the LAF. Second, since the Government cannot
switch to balances with the Reserve Bank, daily statutorily receive interest on surplus balances with the
fluctuations in banks’ excess reserves (defined as the Reserve Bank under the Act, it typically ‘buys back’
excess balances over and above the CRR stipulation) Government paper from the Reserve Bank and saves
with the Reserve Bank remained range-bound for the
Chart VIII.2 : Excess Bank Reserves and Call Rate
greater part of 2003-04 (Chart VIII.2). This imparted
stability to the interest rate environment during the 30000 Pre-auction End-March 7
build-up LAF bids considerations
year.
Excess Bank Reserves (Rupees crore)

25000 CRR cut rejected

8.9 During 2003-04, the Reserve Bank stepped 20000 CRR
cut 6
up sterilisation operations through outright open
Call Rate (Per cent)

15000
market sales and LAF repo operations. As capital
flows persisted, the Reser ve Bank’s stock of 10000
5
Government securities for OMO and the LAF was 5000
augmented by i) conversions of the available stock of
0
non-marketable special securities into marketable
4
paper; and ii) private placements of Government -5000
paper against the release of foreign exchange for the -10000 Tight
Tight Repo Rate
Repo Rate cut
cut
liquidity
liquidity
prepayment of the Government’s external debt.
-15000 3
Persistent and sizeable cash balances of the
1-Apr-03
1-May-03
31-May-03
30-Jun-03
30-Jul-03
29-Aug-03
28-Sep-03
28-Oct-03
27-Nov-03
27-Dec-03
26-Jan-04
25-Feb-04
26-Mar-04
25-Apr-04
25-May-04
24-Jun-04

Government with the Reserve Bank in the second half

of the year were invested in gilts, preventing their use
in OMO. The reduction of Government paper in the
Reserve Bank’s portfolio necessitated a switch from Excess Reserves Call Money Rate
outright OMO to repo operations thereby burdening

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 MONETARY AND CREDIT POLICY OPERATIONS

on interest payments. Third, the Reserve Bank cannot Bank’s operations in the foreign exchange market and
issue its own paper under the extant provisions of the parks the proceeds in an identifiable cash account,
Act. The stock of marketable Government paper with viz., the MSS account to be maintained and operated
the Reserve Bank being finite can, thus, affect the extent by the Reserve Bank. As a result, the primary liquidity
of its monetary policy operations. generated by the accretion to the Reserve Bank’s
foreign currency assets is counter-balanced by a
8.11 In this context, the Reserve Bank appointed
reduction in the Reserve Bank’s net credit to the
two groups, viz., a Working Group on Instruments of
Centre.
Sterilisation and an Internal Group on Liquidity
Adjustment Facility to search for alter native 8.12 The course of management of capital flows
instruments of sterilisation (Box VIII.1). On the basis reflected the constraints within which the Reserve
of the recommendations of the Working Group on the Bank had to operate. In this regard, sterilisation
Instruments of Sterilisation, the MSS was instituted in operations during 2003-04 and the first quarter of
April 2004 (refer to Box I.2 of Section I). In terms of 2004-05 could be divided into three distinct phases
the scheme, the Government issues securities to mop in terms of the relative shifts in reliance on instruments
up the excess liquidity emanating from the Reserve used (Table 8.3).

Box VIII.1
Instruments of Sterilisation
The Reserve Bank’s Working Group on the Instruments of New instruments requiring amendments to the Reserve Bank
Sterilisation (Chairperson: Smt. Usha Thorat) examined of India Act
options that would augment the Reserve Bank’s ability to • The Group favoured the institution of a standing deposit-
sterilise capital inflows. Against the background of type facility with flexibility in determination/remuneration
international experience and the existing financial and legal of CRR balances so that interest can be paid on deposit
structure, the Working Group recommended a two-pronged balances actually maintained by scheduled banks with
approach for strengthening and refining the existing the Reserve Bank.
instruments and exploring new instruments appropriate in
the Indian context to sterilise foreign exchange inflows. The • Although many emerging market economies issue
appropriate mix of instruments would depend on the central bank paper to absorb liquidity, the Group did not
prevailing circumstances, the associated costs and benefits find it desirable to pursue the option of such issuance.
and the opportunity cost of not using sterilisation as a policy Central bank bills tend to concentrate the entire cost of
option. The major recommendations of the Group include: sterilisation in the central bank’s balance sheet. Cross-
country experience suggests that the resultant financial
Existing instruments impairment often erodes the ability of the monetary
authority to conduct liquidity operations. Besides, the
• The use of open market operations as an instrument of existence of two sets of risk-free paper - gilts and central
sterilisation. bank bills - tends to fragment the market.
• As outright transactions entail the permanent absorption New instruments which do not require legislative
of liquidity and transfer of market risk to participants, amendments
the alternative of using the existing stock of securities • The Group recommended the institution of a Market
for longer-term repos (up to 3 to 6 months) could also Stabilisation Scheme (MSS). Proceeds of Government
be considered. paper issued under the MSS to mop up liquidity
• It is not desirable to use the LAF as an instrument of generated on account of the accretion to the Reserve
sterilisation on an enduring basis, although it could Bank’s foreign assets would be parked with the Reserve
supplement other instruments for limited periods. Bank to neutralise the monetary impact of capital flows.
Based on this recommendation, a Memorandum of
• Sur plus balances of the Gover nment could be Understanding was signed between the Government and
maintained with the Reserve Bank without any payment the Reserve Bank on March 25, 2004 providing for the
of interest. This would entail a review of the 1997 issuance of Treasury Bills and dated securities within
agreement between the Government and the Reserve an overall ceiling of Rs.60,000 crore, subject to review,
Bank under which the Reserve Bank transfers securities if necessary.
to the Government account in lieu of interest payments.
Reference
• The use of CRR as an instrument of sterilisation should Reserve Bank of India (2004), “Report of the Working
not be ruled out under extreme conditions of excess Group on Instruments of Sterilisation”, Reserve Bank of
liquidity and when other options are exhausted. India Bulletin, April.

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Table 8.3: Phases of Reserve Bank’s Chart VIII.3 : Sterilisation of Capital Flows
Liquidity Management Operations
(Rs. crore) 120000

Item April 1- December March 27- 100000

December 27, 2003- June
26, 2003 March 25, 2004 80000
26, 2004
60000
1 2 3 4
1. RBI’s Foreign 93,334 46,171 34,971 40000

Rupees crore
Currency Assets
(adjusted for revaluation) 20000

2. Repos (net) 0
(under LAF) 27,075 31,910 -35
-20000
3. OMO sales (net) 36,517 5,332 429
-40000
4. MSS – – 37,812
5. Currency 29,914 14,896 14,042 -60000

6. Others (residual) 8,106 -15,601 -17,274 -80000

6.1 Surplus cash
Phase 1 Phase 2 Phase 3
balances of the
Centre with the Reserve Bank's FCA LAF OMO MSS
Reserve Bank 13,135 -6,685 -18,577
Bank Reserves # -8,278 9,634 -3
(1-2-3-4-5-6) by occasionally rejecting bids, all bids were, by and
# : Excludes vault cash with banks. large, accepted in the second half of the year as the
pressure from persistent capital inflows intensified
8.13 During the first phase, i.e., April-December (Table 8.4).
2003, the Reserve Bank continued to absorb the
liquidity emanating from capital inflows by deploying 8.15 LAF repo operations were conducted to mop
an almost even mix of open market outright sales up the usual spurt in liquidity at the beginning of the
(amounting to 39.1 per cent of the accretion of the year. Bids ebbed in May and June as the Centre’s
Reserve Bank’s foreign assets) and the LAF (29.0 market borrowing programme gathered momentum.
per cent). In the second phase, i.e., January-March Repo bids soared – both in number and average size –
2004, the burden of sterilisation fell on the LAF, which in July with the easing of liquidity conditions, reinforced
offset almost 70 per cent of the accretion to the by the return flow of advance tax payments and the
Reserve Bank’s foreign currency assets. In the third seasonal easing in cash demand. A 50 bps cut in the
phase, i.e., during the first quarter of 2004-05, the repo rate in August 2003 briefly closed the differential
MSS emerged as the primary mechanism of liquidity with the call rate and caused a temporary lull in repo
management (Chart VIII.3). Adding the balances biddings. A mix of open market sales and a series of
parked in repos under the LAF and the paper issued 28-day repos to rationalise expectations were reflected
under the MSS, the total liquidity overhang in the in some reduction in LAF repos in October. Repo bids
system exceeded Rs.1,00,000 crore or 5.0 per cent picked up again from November with the persistence
of broad money by end-June 2004. of capital inflows as well as the gradual cessation of
outright OMO. Accordingly, LAF repo operations had
Liquidity Adjustment Facility to not only provide an anchor to call rates but also act
as the main sterilisation instrument. This pushed up
8.14 The LAF is the Reserve Bank’s primar y the average daily repo outstanding to Rs.54,915 crore
instrument for modulating liquidity and transmitting in March 2004, despite an outflow of over Rs.25,000
interest rate signals to the market. Besides the usual crore during March 26-31, 2004 on account of the build-
function of day-to-day liquidity management, the LAF up of bank reserves and transfer of the proceeds of
was increasingly used as an instrument of sterilisation ONGC disinvestment to the Government’s account with
during 2003-04. As a result, the average daily repos the Reserve Bank (Chart VIII.4).
outstanding were consistently higher than those in
2002-03. Although the Reserve Bank adjusted the 8.16 The pressure on the LAF began to build up
quantum of primary liquidity in the first half of the year in April 2004 due to strong capital inflows as well as

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 MONETARY AND CREDIT POLICY OPERATIONS

Table 8.4: Repo/Reverse Repo Bids under LAF

Repo Reverse Repo

Month No. of No. of days No. of days No. of days No. of No. of days No. of days No. of days
days all bids of full of partial days bids all bids of full of partial
bids were were acceptance acceptance were were acceptance acceptance
received rejected of bids of bids received rejected of bids of bids
1 2 3 4 5 6 7 8 9
2003-04
April 17 0 15 2 1 0 1 0
May 19 0 18 1 1 0 1 0
June 20 0 18 2 0 0 0 0
July 23 0 22 1 1 0 1 0
August 20 0 19 1 0 0 0 0
September 21 0 19 2 0 0 0 0
October 22 2 19 1 1 1 0 0
November 19 0 19 0 0 0 0 0
December 22 0 22 0 0 0 0 0
January 21 0 21 0 1 1 0 0
February 18 0 17 1 0 0 0 0
March 21 0 21 0 1 0 1 0
2004-05
April 19 0 19 0 0 0 0 0
May 20 0 20 0 0 0 0 0
June 21 0 21 0 1 0 1 0
July 23 0 23 0 0 0 0 0

the usual seasonal easing in credit demand. As a 8.17 The Reserve Bank introduced a revised LAF
result, outstanding LAF repos jumped to an average scheme on March 29, 2004 based on the
of over Rs. 74,000 crore during April and May 2004. recommendations of the Internal Group on LAF
The pressure on the LAF window started abating by (Box VIII.2). Daily repo/reverse repo variable rate
June due to a combination of factors such as auctions were replaced by 7-day fixed rate repo
seasonal currency demand, the beginning of the auctions and daily fixed rate reverse repo auctions,
with a spread of 150 bps. The 14-day variable rate
Government’s borrowing programme, slowdown in
multiple price repo auctions, however, would
capital inflows and the switch to the MSS.
continue for some time, but would be phased out in
Chart VIII.4 : Repo Auctions under LAF and Call Rate due course.
0 7
Open Market Operations
Repo Amount (Rupees crore)

-20000 8.18 The Reserve Bank continued to supplement

6
LAF absorptions with outright open market sales. The
-40000 Reserve Bank is required to have a sufficient stock
Per cent

5
of Government paper to modulate liquidity through
-60000 OMO. The ratio of open market sales by the Reserve
Bank to the addition to the gilt portfolio dropped to
4 about 50 per cent during 2003-04 from an average of
-80000
90 per cent in the preceding five years following a
switch to LAF operations (Table 8.5).
-100000 3
8.19 The Reserve Bank conducted five rounds of
3-Apr-03
19-May-03
23-Jun-03

3-Sep-03
29-Jul-03

9-Oct-03
13-Nov-03
19-Dec-03
27-Jan-04
5-Mar-04
13-Apr-04
21-May-04
25-Jun-04
30-Jul-04

open market operations during 2003-04. OMO sales

in May mopped up the surge in domestic liquidity
emanating from capital inflows in the preceding two
Repo Amount Call Rate (right scale) months. These operations resumed in August and
Repo Rate (right scale) Bank Rate (right scale)
early September after the Reserve Bank replenished
its stock of marketable paper by converting non-

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 ANNUAL REPORT

Box VIII.2
Internal Group on Liquidity Adjustment Facility
The Reserve Bank’s Internal Group on Liquidity Adjustment • A standing deposit facility should be instituted with due
Facility made a number of recommendations to enhance the amendments in the Reserve Bank of India Act, 1934 to
efficacy of liquidity management. accord the Reserve Bank greater flexibility in LAF
• Daily LAF auctions could be replaced by weekly auctions operations as also to provide a floor to the interest rate
conducted on a daily basis to enable balanced corridor.
development of various segments of the money market • Pending legislative amendments, the possibility of
with the flexibility to conduct overnight repo auctions if modifying the current CRR prescription to accommodate
the situation so warrants. a standing deposit-type facility with placement of deposits
• Fixed rate LAF auctions could replace variable rate at the discretion of banks could be explored; remuneration
auctions to enhance the ability of the Reserve Bank to on the standing deposit-type facility would be below the
transmit policy signals, albeit with the flexibility to use the repo rate.
variable price auction format, if necessary. • The Bank Rate should be aligned to the reverse repo
• The ambit of LAF operations could be enlarged by linking rate under normal circumstances. In the event of
the entire liquidity support, including refinance, to the introduction of a standing deposit facility, the interest rate
reverse repo rate. corridor in the money market would be defined by the
• The timing of LAF auctions could be shifted to the middle Bank Rate/reverse repo rate as the ceiling and the
of the day from 10.30 am to enable sufficient inter-play of standing deposit facility rate as the floor.
market liquidity, especially with the provision of intra-day
liquidity with the operationalisation of the real time gross Reference
settlement (RTGS) system. Reserve Bank of India (2004), “Report of the Internal
• The LAF should primarily modulate liquidity of a somewhat Group on Liquidity Adjustment Facility”, Reserve Bank of
“temporary” nature at the margin on a day-to-day basis. India Bulletin, January.

marketable special securities in its portfolio into in September. A final round of OMO sales took place
tradable paper. A fourth round took place in October, in January 2004 to supplement the LAF operations in
funded by drawals from repo operations following the sterilising the large accretion to the Reserve Bank’s
conversion of the available stock of special securities NFA (Table 8.6).

Table 8.5: Reserve Bank’s Holdings of Central Government Dated Securities

(Rupees crore)

Year Devolvement Private OMO Conversion Total addition OMO Net Outstanding Memo :
on Reserve Placement Purchases of Special to stock of Sales by Addition Holding by Net Repos
Bank taken by by Reserve Securities Reserve Reserve to Stock Reserve Outstanding
Reserve Bank into Dated Bank ‘s Bank (6-7) Bank
Bank Securities Investments (end
(2+3+4+5) period)*
1 2 3 4 5 6 7 8 9 10
1996-97 3,698 – 623 – 4,321 11,206 -6,885 6,666 2,300
1997-98 7,028 6,000 467 20,000 33,495 8,081 25,414 31,977 4,202
1998-99 8,205 30,000 – – 38,205 26,348 11,857 42,212 400
1999-00 – 27,000 1,244 – 28,244 36,614 -8,370 35,190 –
2000-01 13,151 18,000 4,471 – 35,622 23,795 11,827 41,732 1,355
2001-02 6 79 28,213 5,084 – 33,976 35,419 -1,443 41,631 4,355
2002-03 5,175 31,000 – 40,000 76,175 53,780 22,395 63,866 2,415
2003-04 – 21,500 – 61,818 83,318 41,849 41,469 1,04,066 34,795
2004-05 217 – – – 217 716 -499 1,03,975 32,665
(up to August 14)

* : Inclusive of securities sold under the LAF and the investment of the Centre’s surplus.

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 MONETARY AND CREDIT POLICY OPERATIONS

Table 8.6: Monthly Primary Liquidity Flows and Open Market Operations
(Rupees crore)

Month RBI’s Foreign Net RBI Credit to RBI’s Initial Net OMO Sales
Currency Assets# Centre Subscription
2004-05 2003-04 2002-03 2004-05 2003-04 2002-03 2004-05 2003-04 2002-03 2004-05 2003-04 2002-03
1 2 3 4 5 6 7 8 9 10 11 12 13
April 32,608 3,817 3,076 -29,230 9,706 11,976 0 0 10,000 253 7 5,307
May 202 15,626 1,330 -7,038 -2,926 1,838 0 5,000 10,018 116 5,569 1,524
June 350 4,500 3,739 6,240 -6,346 -12,359 0 0 2,000 60 44 189
July 946 13,865 8,820 -8,530 -19,847 8,122 0 0 1,157 218 57 6,538
August 11,550 7,828 -24,023 -19,083 0 0 11,526 7,025
September 6,417 6,233 -9,874 -8,594 0 0 5,089 6,355
October 13,124 7,949 6,494 -8,074 0 0 14,024 71
November 10,775 11,887 -8,172 -1,192 0 0 69 11,073
December 13,661 11,223 -14,166 -8,616 0 0 132 4,549
January 11,723 9,375 4,420 -3,288 9,500 0 5,178 10,995
February 14,610 11,062 -17,738 -6,206 7,000 0 85 88
March 21,760 -434 6,407 17,077 0 13,000 69 66
# : Adjusted for revaluation.
Note : Data based on March 31 for March and last reporting Friday for all other months.

Market Stabilisation Scheme the interest rate structure. In order to enhance

8.20 The Market Stabilisation Scheme (MSS), transparency in pricing of loan products by banks, the
operationalised in April 2004, has emerged as a key April 2003 Monetary and Credit Policy Statement
instrument of liquidity management. The issuance advised banks to announce their benchmark prime
under the MSS in April 2004 amounted to Rs. 23,000 lending rates (BPLRs), taking into account the actual
crore reflecting the bunching of capital flows. An cost of funds, operating expenses and a minimum
unscheduled auction amounting to Rs. 5,000 crore of margin to cover the regulator y requirement of
dated securities under the MSS was held on April 8, provisioning/capital charge and a profit margin.
2004 to counter-balance the large accretion to the Following a series of meetings with banks for
Reserve Bank’s foreign currency assets (Rs.16,746 expeditious implementation, the BPLR guidelines
crore during April 1-9, 2004). The total stock of Treasury were modified into an operationally flexible framework.
Bills and dated securities issued under the MSS The November 2003 Mid-Term Review of Monetary
amounted to Rs.39,730 crore by end-June 2004, in and Credit Policy clarified that banks have the freedom
excess of the indicative allocation of Rs.35,500 crore
to price their loan products based on time-varying
for the quarter April-June 2004. With the abatement of
term premia and relevant transaction costs using
capital inflows in May-June, funds invested in the MSS
market benchmarks in a transparent manner. On
(Rs. 16,730 crore) essentially reflected a drawdown of
the surplus parked in the LAF (Rs. 15,000 crore). November 25, 2003 the Indian Banks’ Association
(IBA) advised its member banks to announce BPLRs.
8.21 A schedule for issuances amounting to By April 2004, almost all commercial banks had
Rs.36,500 crore (including the rolling over of Rs.19,500 adopted the new system of BPLR.
crore under 91-day Treasury Bills issued during the first
quarter) for the second quarter ending September 2004 8.23 Banks were permitted to determine rates of
was issued on June 29, 2004. The total amount raised interest on loans and advances for purchase of
under the MSS amounted to Rs. 46,480 crore by August consumer durables to individuals against shares
14, 2004, inclusive of Rs.20,000 crore raised through and debentures/bonds and other non-priority sector
dated securities with a residual maturity of up to 2.5
personal loans without reference to prime lending
years.
rates (PLR) and regardless of the size of the loan.
Interest Rate Policy
Lending Rates Interest Rates on Export Credit
8.22 The Reserve Bank continued to take policy 8.24 The reductions in the interest rate ceiling on
initiatives to impart a greater degree of flexibility to pre-shipment rupee export credit up to 180 days and

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 ANNUAL REPORT

post-shipment credit up to 90 days to PLR minus 250 is permitted against these deposits. The Foreign
bps on September 24, 2001 were extended up to April Currency Non-Resident (Banks) {FCNR(B)} deposit
30, 2005. Interest rates on foreign currency export rate continues to be linked to LIBOR/SWAP rates (at
credit are linked to a ceiling related to the London LIBOR/SWAP rates of corresponding maturities minus
Inter-Bank Offered Rate (LIBOR)/SWAP rates (i.e., 25 bps). The Union Budget for 2004-05 proposed the
at LIBOR plus 75 bps). Banks are permitted to arrange
withdrawal of exemptions on interest income from NRI
lines of credit from overseas banks/financial
deposits, effective September 1, 2004.
institutions to augment foreign currency funds for
onlending to expor ters. Such borrowings by
authorised dealers for financing export credit are kept Rationalisation of Interest Rates on Small Savings
outside the stipulated limit on their overseas foreign 8.26 The rationalisation of small saving schemes
currency borrowings. and the interest rates paid thereon remains an
important policy priority in view of the high fiscal cost
Interest Rates on Non-resident Deposits and in terms of the implications for the interest rate
structure. In this context, the Union Government
8.25 With a view to providing consistency in interest
constituted an Advisory Committee to Advise on the
rates offered on non-resident deposits, an interest rate
Administered Interest Rates and Rationalisation of
ceiling linked to the LIBOR/SWAP rates was imposed
Saving Instruments (Chairman: Dr. Rakesh Mohan)
on NRE deposits in stages during 2003-04. The ceiling
on January 24, 2004. Recommendations of the
on interest rate on fresh (and renewals of) term Committee in respect of introduction of a Senior
deposits for one to three years under the NRE scheme Citizens Savings Scheme and discontinuation of the
was placed at 250 bps above the LIBOR/SWAP rates Deposit Scheme for Retiring Employees and 6.5 per
for the US dollar of corresponding maturity, effective cent Saving Bonds 2003 (non-taxable) have been
July 17, 2003. The differential was further reduced to implemented with some modifications (Box VIII.4).
100 bps, effective September 15, 2003 and by 25 bps
effective October 18, 2003 and was finally closed, CREDIT DELIVERY
effective Apr il 17, 2004 in pursuance of the
recommendations of the Internal Group on External 8.27 The Reserve Bank assigns the highest priority
Liabilities of Scheduled Commercial Banks (Box to nurturing a conducive credit culture among financial
VIII.3). Furthermore, the NRE savings deposit rate intermediaries, corporates and households. Credit
was capped at a maximum of LIBOR/SWAP rates for delivery, in particular, to agriculture, SMEs and
six months’ maturity on US dollar deposits effective infrastructure is critical to sustain growth. In these
April 17, 2004. No lien of any type, direct or indirect, sectors, the issue of availability of credit is often as

Box VIII.3
Internal Group on External Liabilities of Scheduled Commercial Banks
The Internal Group on External Liabilities of Scheduled withdrawn to restrict the ceiling to the LIBOR of the
Commercial Banks recommended that the current reserve corresponding maturity. The Resident Foreign Currency
and liquidity requirements on non-resident Indian (NRI) (RFC) deposit scheme could be made non-interest bearing
deposits may be left unaltered, as they are aligned to domestic as is the case with the Exchange Earners’ Foreign Currency
deposits. Interest income from NRI deposits may be made (EEFC) and RFC(D) accounts. Although the existing Non-
taxable on the lines of domestic deposits, consistent with Resident Ordinary (NRO) term/recurring deposits may be
current account convertibility. The acceptance of NRI deposits allowed to be maintained till maturity, fresh NRO deposits
should be restricted to authorised dealers only. Acceptance may have the nature of current/savings accounts only. For
of NRI deposits by non-banking financial companies and non- better availability of export credit in foreign currency, the ceiling
financial corporates could be phased out. on interest on such credit should be deregulated. If complete
The Group recommended an alignment of the pricing of non- deregulation was not considered feasible, the interest rate
resident external (NRE) deposits with rates of return in the ceiling should be raised by 50 basis points to LIBOR plus
international market. The NRE savings deposit rate could be 125 basis points.
delinked from the domestic savings deposit rate, with a ceiling Reference
of one-month LIBOR/SWAP rates on US dollar deposits. Reserve Bank of India (2004), “Report of the Internal Group
Furthermore, the Group recommended that the premium on External Liabilities of Scheduled Commercial Banks”,
available on interest rates on NRE term deposits could be Reserve Bank of India Bulletin, July.

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 MONETARY AND CREDIT POLICY OPERATIONS

Box VIII.4
Advisory Committee to Advise on the Administered Interest Rates and
Rationalisation of Saving Instruments
The Advisory Committee to Advise on the Administered commercial banks. However, in the interest of rationalising
Interest Rates and Rationalisation of Saving Instruments existing saving schemes, the Committee recommended
(Chairman: Dr. Rakesh Mohan), which submitted its report discontinuance of a few saving instruments offered by the
in May 2004, addressed three broad issues within its overall Government where investments are primarily motivated by
terms of reference, viz. , (i) suggesting appropriate tax benefits available under Section 88 and Section 10 of
benchmarking and spread rules for administered interest rate, the Income Tax Act. Accordingly, it recommended
(ii) rationalising existing saving schemes particularly in respect discontinuance of National Savings Certificates (VIII Issue),
of tax treatment in the light of the recommendations made by Deposit Scheme for Retiring Employees and 6.5 per cent
the Expert Committee to Review the System of Administered GoI (Tax Free) Savings Bond (2003). The Committee also
Interest Rates and Other Related Issues (Chairman: Dr. Y. V. recommended the discontinuance of the Kisan Vikas Patra
Reddy) in 2001, and (iii) designing a structure of the proposed in which tax is not deducted at source and therefore, could
Dada-Dadi (Senior Citizens) Scheme as announced by the lead to potential difficulties from the viewpoint of tax
Finance Minister on January 9, 2004. management. In this respect, the Committee also
After considering alternative benchmarks like the inflation emphasised the need to explore ways and means of making
rate, bank deposit rate, Bank Rate, and yields on tax deductible at source (TDS) provisions effectively
Government securities, the Committee decided to continue applicable to taxable bonds. The Committee, however,
with Government securities (G-sec) yields as the most observed that the Public Provident Fund (PPF), which also
suitable benchmark in line with the suggestion made by the enjoys similar tax benefits, could be retained in its present
Reddy Committee as they are mostly market determined, form for sometime as it provides income security, especially
signal a measure of expected (rather than past) inflation in the unorganised sector. Similarly, other post office
and would facilitate rationalisation of interest rates on various schemes catering to the needs of small savers, particularly
schemes. However, in order to impart stability to the in rural and semi-urban areas, were recommended to
benchmark, the Committee recommended that the continue in their present form.
benchmark could be calculated on a weighted average basis, The Committee recommended a structure for the Dada-Dadi
with weights of 0.67 to G-sec yields for the previous year Scheme designed to improve the welfare of senior citizens.
and 0.33 to yields for the year before that. Furthermore, a The interest rate on the Scheme could be 100 basis points
fixed illiquidity premium of 50 basis points over the average higher than the average benchmark for other small saving
benchmark yields was also retained on similar lines as instruments. The tenor could be shorter at three years to
suggested by the Reddy Committee. The Committee ensure liquidity. The Scheme would be taxable in terms of
expressed concern over the sharply falling yields over the Section 80L of the Income Tax Act so that senior citizens at
past few years due to excess liquidity in the financial market the lower end of the tax bracket, ipso facto, obtain higher
and suggested an inter-year movement of interest rate returns. An individual ceiling of Rs. 20 lakh was proposed
fluctuations within a band of 100 basis points to address on investment.
the immediate concern of savers.
Reference
The Committee was in favour of continuing most of the small
Government of India (2004), “Report of the Advisory
saving schemes as these are popular in rural and semi-
Committee to Advise on the Administered Interest Rates
urban areas due to convenience, habitual preference and
and Rationalisation of Savings Instruments”, Reserve Bank
ease of transactions as well as more intensive penetration
of India Bulletin, August.
of post offices as compared with the branch network of

important as the cost of credit, especially as the rates Policy, the Reserve Bank constituted an Advisory
of interest on alternative sources of finance from the Committee on Flow of Credit to Agriculture and
informal sector are prohibitively high. It is in this Related Activities from the Banking System
context that the Reserve Bank continued to pursue (Chairman: Prof. V.S. Vyas) and a Working Group on
initiatives to ensure flow of adequate bank credit at Flow of Credit to SSI Sector (Chairman: Dr. A.S.
reasonable rates of interest. Ganguly) to recommend measures to improve the
credit delivery mechanisms for agriculture and SMEs,
8.28 The monetary and credit policy has taken
respectively.
several initiatives to improve the credit delivery
mechanism and credit flows to different sectors. 8.29 A package of measures including withdrawal
Pursuant to the announcements in the November of limits on unsecured exposures of banks and
2003 Mid-Term Review of the Monetary and Credit improvement in the credit information system available

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 ANNUAL REPORT

with the Credit Information Bureau (India) Limited Table 8.7: Priority Sector Advances
(CIBIL) was introduced to complement the process (Rupees crore)
of refinements in the credit delivery mechanism from As on last Public Sector Private Foreign
the supply side. Banks were encouraged to align the reporting Friday of Banks Sector Banks Banks
pricing of credit with the assessment of credit risk in 1 2 3 4
order to improve credit delivery and pass on the
March 1999 1,04,094 13,947 8,268
benefit of lower rates to borrowers with good track (39.2) (41.3) (36.5)
records. March 2000 1,27,478 18,368 9,934
(40.3) (38.0) (35.2)
Priority Sector Lending March 2001 1,49,116 21,567 11,572
(43.7) (36.7) (33.5)
8.30 Several measures were taken to improve the March 2002 P 1,71,185 25,709 13,414
credit delivery mechanism in the priority sector through (43.1) (40.9) (34.0)
March 2003 P 2,03,095 36,705 14,848
raising of loan limits and expanding the definition of the (42.5) (44.4) (33.9)
priority sector. Investment limits in plant and machinery March 2004 P 2,45,501 52,629 17,651
for 13 items of the stationery sector and 10 items of the (43.9) (47.3) (34.2)
drugs and pharmaceuticals sector in addition to hosiery P : Provisional.
and hand tools (which figure in the list of items reserved Notes : 1. Figures in parentheses are percentages to net bank credit
for manufacture in the small scale industries sector) in the respective group.
were enhanced from Rs. one crore to Rs. five crore for 2. The target for aggregate advances to the priority sector
the purpose of classification under priority sector is 40 per cent of net bank credit for domestic banks and
32 per cent of net bank credit for foreign banks.
advances. Furthermore, the limit for uncollateralised
loans to SSI units with good financial positions and track
directly for housing and indirectly for investment in
record was increased from Rs.15 lakh to Rs.25 lakh
bonds issued by the National Housing Bank (NHB)/
(with the approval of the appropriate authority in the
Housing and Urban Development Cor poration
banks). All new loans granted by banks to non-banking
(HUDCO) for housing (i.e., indirect lending); (ii) retail
financial companies (NBFCs) for the purpose of on-
trade by public sector banks; and (iii) lending to direct
lending to the SSI sector were reckoned as priority
housing in the case of private sector banks. Nine private
sector loans. Banks are allowed to extend direct finance
sector banks and two public sector banks did not
to the housing sector up to Rs.10 lakh in rural and semi-
achieve the overall priority sector lending target of 40
urban areas as a part of priority sector lending.
per cent as on the last reporting Friday of March 2004.
Moreover, educational loans up to the ceiling of Rs.7.5
lakh for studies in India and Rs.15 lakh for studies 8.33 Several recommendations of the interim report
abroad were treated as priority sector advances. As of the Advisory Committee on Flow of Credit to
indicated in the Union Budget, 2004-05 commercial Agriculture and Related Activities from the Banking
banks have agreed to waive the need for collateral for System were implemented by the Reserve Bank in
educational loans up to Rs. 7.5 lakh in place of Rs. four its Annual Policy Statement for 2004-05. Loans for
lakh earlier, subject to satisfactory guarantee on behalf storage units (including cold storage) for storing
of the student. A Gold Card Scheme was introduced for agricultural produce/products, irrespective of their
easy availability of export credit on the best terms to location, are to be reckoned as indirect agricultural
creditworthy exporters with good track record to step advances under the priority sector. Investment by
up export credit offtake. banks in securitised assets representing direct or
indirect advances to agriculture would be treated as
8.31 Foreign banks are required to make good the
direct/indirect lending to agriculture under the priority
shortfall in priority sector targets and sub-targets by
sector, provided that securitised loans are originated
depositing an equivalent amount with the Small
by banks and financial institutions. Banks were
Industries Development Bank of India (SIDBI) for a
advised to waive margin/security requirements for
period of one year. The interest rate on deposits of
agricultural loans up to Rs.50,000 and in the case of
foreign banks placed with the SIDBI was reduced to
agri-business and agri-clinics, for loans up to Rs.five
the Bank Rate, i.e., 6.0 per cent from 6.75 per cent,
lakh. Non-perfor ming asset (NPA) nor ms for
with effect from November 3, 2003.
agricultural finance, including agricultural term loans,
8.32 Commercial banks achieved the overall target were modified with a view to aligning the repayment
for priority sector lending (Table 8.7). This was dates with the harvesting of crops (Box VIII.5).
facilitated by (i) higher lending by banks to individuals According to the modified norms, a loan will be treated

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 MONETARY AND CREDIT POLICY OPERATIONS

Box VIII.5
Advisory Committee on Flow of Credit to Agriculture and
Related Activities from the Banking System
The Reserve Bank’s Advisory Committee on Flow of Credit innovations, offering hedging mechanisms to the farmers,
to Agriculture and Related Activities from the Banking System providing legal backing to tenancy to facilitate access to
(Chairman: Prof. V.S. Vyas) submitted its report in June 2004. credit, capacity building of borrowers, greater use of
The major recommendations of the Committee are: information technology, procedural simplifications and
• A comprehensive review of mandatory lending to modifications in the service area approach.
agriculture by commercial banks to enlarge direct lending • Reduction in cost of agricultural credit through enhancing
programmes for greater integration of investment credit the cost effectiveness of agricultural loans, especially in
and production credit. terms of cost of raising funds, transaction cost and risk
• A road map for public sector and private sector banks to cost.
reach a level of direct lending at 13.5 per cent of net • Non-performing asset (NPA) norms in agricultural credit
bank credit - within the overall limit of 18.0 per cent of to be attuned to the cash flow of the farmer, coinciding
total agricultural lending - within a period of four years with the harvesting/marketing of the crop.
with an interim target of 12 per cent in two years. • Impediments to the flow of credit to disadvantaged
• Special Agricultural Credit Plan (SACP) to be restricted borrowers to be mitigated through reduction in cost of
to direct lending and extended to private sector banks. borrowing, revolving credit packages, procedural
• The share of small and marginal farmers in agricultural simplifications, involvement of Panchayati Raj institutions
credit to be raised to 40 per cent of disbursements under and extension of micro finance.
the Special Agricultural Credit Plan (SACP) by the end Reference
of the Tenth Plan period. Reserve Bank of India (2004), “Report of the Advisory
• Expanding the outreach of banks in rural areas by Committee on Flow of Credit to Agriculture and Related
enlarging retail lending to agriculture, externalising Activities from the Banking System”, Reserve Bank of India
retailing through corporate dealer networks, organisational Bulletin, August.

as an NPA if the instalment of principal or interest micro finance was extended to include consumption
remains unpaid for two crop seasons beyond the due expenditure. Banks were also advised that the group
date in the case of loans for short duration crops and dynamics of the SHGs need not be regulated. There
one crop season beyond the due date in the case of was also no need to impose or insist upon formal
loans for long duration crops. structures. Micro finance institutions are not allowed
to accept public deposits unless they comply with
Micro Finance the extant regulatory framework of the Reserve
Bank.
8.34 Self-help Groups (SHGs) contribute to
development of human and social capital. The number
of SHGs linked to banks under the SHG-bank linkage Credit to Agricultural Sector
programme aggregated 10,79,091 as on March 31, 8.36 The share of agricultural advances of public
2004 of which 90 per cent were exclusively women sector banks in outstanding bank credit has remained
groups (Table 8.8). The cumulative disbursement of stable in recent years (Table 8.9). Disbursements by
bank loans to SHGs amounted to Rs. 3,904 crore as public sector banks under the Special Agricultural
on March 31, 2004 to around 16 million families. This Credit Plan were Rs. 42,211 crore against the
translates to an average loan per SHG at Rs. 36,179 projection of Rs. 42,576 crore during 2003-04.
and the average loan per family at Rs. 2,412.
8.37 Some new private sector banks also stepped
8.35 The Reserve Bank stepped up efforts to up agricultural advances. The recovery of direct
nur ture micro finance initiatives. Based on the agricultural advances of public sector banks continued
recommendations of the four Groups on issues to remain stable (Table 8.10).
relating to structure and sustainability, funding,
regulation and capacity building of micro finance 8.38 Several initiatives have been taken in
institutions, banks were advised to provide adequate pursuance of the objective set in the Union Budget
incentives to their branches for financing SHGs, for 2004-05 to achieve a doubling of the flow of credit
establishing linkages and adopting simple and easy to agriculture in three years. Banks were advised to
procedures to suit local conditions. The ambit of reschedule/restructure debts as on March 31, 2004,

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 ANNUAL REPORT

Table 8.8: Self-Help Groups and Bank Linkages

(Amount in Rs. crore)
Region/ State Commercial Banks Regional Rural Banks Co-operative Banks Total
No. of Bank No. of Bank No. of Bank No. of Bank
SHGs Loans SHGs Loans SHGs Loans SHGs Loans@
1 2 3 4 5 6 7 8 9
Northern Region
Haryana 744 7.9 1,563 6.7 37 0.1 2,344 14.6
Himachal Pradesh 5,156 10.0 2,281 4.5 5,791 17.0 13,228 31.5
Punjab 724 3.6 216 1.6 708 3.0 1,648 8.3
Jammu and Kashmir 606 1.6 371 0.6 263 1.4 1,240 3.6
Rajasthan 12,476 25.4 16,996 38.1 4,374 9.8 33,846 73.4
New Delhi 90 0.9 0.0 0.0 90 0.9
Sub-total 19,796 49.4 21,427 51.6 11,173 31.4 52,396 132.4
North Eastern Region
Assam 1,809 6.1 8,529 10.2 368 0.5 10,706 16.9
Manipur 162 0.5 63 0.1 0.0 225 0.6
Meghalaya 67 0.6 117 0.0 10 0.0 194 0.6
Sikkim 27 0.1 0 0.0 5 0.0 32 0.1
Tripura 63 0.0 714 0.5 73 0.0 850 0.5
Nagaland 0 0.0 24 0.3 0 0.0 24 0.3
Arunachal Pradesh 150 0.5 53 0.4 22 0.1 225 1.0
Mizoram 1 0.0 21 0.2 0 0.0 22 0.2
Sub-total 2,279 7.8 9,521 11.7 478 0.7 12,278 20.2
Eastern Region
Bihar 5,197 13.7 10,916 16.6 133 0.4 16,246 30.8
Jharkhand 7,841 30.3 4,806 11.2 0.0 12,647 41.5
Orissa 25,959 41.4 43,506 72.3 8,123 13.8 77,588 127.5
West Bengal 10,676 11.1 13,946 20.8 27,063 28.5 51,685 60.5
Andaman and Nicobar Islands 5 0.1 0.0 66 0.3 71 0.3
Sub-total 49,678 96.5 73,174 121.0 35,385 43.0 1,58,237 260.5
Central Region
Madhya Pradesh 11,087 30.4 13,486 24.1 2,522 5.6 27,095 60.0
Chattisgarh 1,283 1.0 5,879 5.1 2,634 1.8 9,796 7.9
Uttar Pradesh 25,860 51.5 51,005 115.0 2,345 5.1 79,210 171.6
Uttaranchal 7,067 25.9 1,581 6.2 2,260 4.7 10,908 36.8
Sub-total 45,297 108.8 71,951 150.5 9,761 17.1 1,27,009 276.3
Western Region
Goa 208 1.1 0.0 98 0.7 306 1.8
Gujarat 9,826 14.6 4,595 8.0 1,553 2.8 15,974 25.5
Maharashtra 18,769 65.5 12,514 32.0 7,252 16.1 38,535 113.6
Sub-total 28,803 81.3 17,109 40.0 8,903 19.6 54,815 140.9
Southern Region
Andhra Pradesh 2,46,123 1,142.6 1,30,470 554.7 8,983 31.1 3,85,576 1,728.4
Karnataka 38,605 100.7 37,087 109.5 28,174 73.5 1,03,866 283.6
Kerala 21,378 78.6 5,365 13.6 6,985 30.7 33,728 122.9
Tamil Nadu and Pondicherry 86,463 589.2 39,894 225.7 24,829 124.1 1,51,186 939.0
Sub-total 3,92,569 1,911.1 2,12,816 903.4 68,971 259.4 6,74,356 3,073.9
Grand Total 5,38,422 2,254.8 4,05,998 1,278.3 1,34,671 371.1 10,79,091 3,904.2

@ : Includes an amount of Rs.69.8 crore provided to 1,71,669 existing SHGs.

Source : National Bank for Agriculture and Rural Development (NABARD).

of farmers who have suffered production and income formulate guidelines on one-time settlement of debt
losses on account of successive natural calamities of small and marginal farmers who have been
during the past five years, provided the State declared defaulters by June 24, 2004 and have
Government concerned declared such districts as become ineligible for fresh credit. Banks are required
calamity affected. Banks were also advised to to review all cases of small and marginal farmers

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 MONETARY AND CREDIT POLICY OPERATIONS

Table 8.9: Outstanding Agricultural Advances of RIDF VIII and RIDF IX. The State Governments
(Rupees crore) are required to pay interest at 7 per cent per annum
End- Public Sector Banks Private Sector Banks
in respect of RIDF IV to VII uniformly and at the Bank
March Amount % of Net Amount % of Net
Rate plus 0.5 percentage points in respect of RIDF
Outstanding Bank Credit Outstanding Bank Credit VIII and IX. In the case of RIDF VIII and IX, rates of
1 2 3 4 5 interest on deposits will continue to be inversely linked
1999 37,632 14.2 3,467 9.1 to the shortfall in lending to agriculture. In pursuance
2000 45,296 14.3 4,023 8.3 of the announcement made in the Union Budget,
2001 53,571 15.7 5,634 9.6 2004-05 the RIDF X has been operationalised with a
2002 P 63,082 15.9 8,022 8.5 corpus of Rs.8,000 crore for the year 2004-05. The
2003 P 73,507 15.3 11,873 10.8 lending and deposit rates in respect of RIDF X will be
2004 P 86,127 15.4 17,594 12.3
as applicable to RIDF IX.
P : Provisional.
Note : The target for advances to agriculture is 18 per cent for the
domestic banks. Kisan Credit Cards
8.40 Banks were advised to intensify plans for
where credit has been denied on the sole ground that issuing Kisan Credit Cards (KCCs) to all eligible
a loan account was ear lier settled through borrowers by March 2004 to enable them to purchase
compromise or write-offs by September 30, 2004. In agricultural inputs and draw cash for production needs.
order to mitigate the acute distress that farmers might During 2003-04, public sector banks issued 30.9 lakh
be facing due to the heavy burden of debt from non- cards, exceeding the target of 30 lakh. Banks can provide
institutional lenders (such as money lenders) and to a personal insurance package to KCC holders – as with
provide them relief from such indebtedness, banks other credit cards – to cover against accidental death or
were advised to advance loans to such farmers permanent disability up to a maximum amount of
against appropriate collateral or group security. Rs.50,000 and Rs.25,000, respectively, with the premium
burden to be shared by the card holder and issuing
Rural Infrastructure Development Fund (RIDF) institution. Scheduled commercial banks (excluding
RRBs) have begun implementing the Personal Accident
8.39 Domestic scheduled commercial banks are Insurance Scheme formulated by the NABARD.
required to deposit shortfalls in lending to the priority
8.41 The Reserve Bank commissioned the National
sector/agricultural lending targets in the Rural
Council for Applied Economic Research (NCAER) for
Infrastructure Development Fund (RIDF) established
conducting a National Impact Assessment Survey to
with the National Bank for Agriculture and Rural
assess the weaknesses of the KCC Scheme and to
Development (NABARD). The lending and deposit
offer suggestions to make it more effective in providing
rates in respect of undisbursed amounts of RIDF IV
adequate and timely credit to agriculture (Box VIII.6).
to IX were restructured with effect from November 1, The Survey was carried out in 11 representative States,
2003 in order to provide a disincentive to banks for covering a sample of 4,337 KCC holders, 865 non-
not achieving the agricultural lending target. Banks holders of KCC and 433 bank branches.
will be paid interest at 6 per cent per annum in respect
of the undisbursed amounts of RIDF IV to VII uniformly Credit to Women
and at varying rates of interest between the Bank Rate
and Bank Rate minus 3 percentage points in respect 8.42 Public sector banks were advised to lend up
to at least 5 per cent of their net bank credit to women
Table 8.10: Recovery of Direct Agricultural by end-March 2004. The credit extended by all public
Advances by Public Sector Banks sector banks stood at 4.7 per cent of overall net bank
(Rupees crore) credit. At end-March 2004, 19 banks achieved the
Year Demand Recovery Overdues Percentage of annual target.
ended Recovery to
June Demand Credit to SSIs
1 2 3 4 5
2000 20,215 14,058 6,158 69.5
8.43 The Reserve Bank continued to take steps to
2001 22,429 15,540 6,889 69.3 enlarge the flow of credit to small scale industries
2002 24,561 17,758 6,803 72.3 (SSIs). Total credit provided by public sector banks to
2003 28,940 21,011 7,929 72.6 SSIs worked out to 10.4 per cent of net bank credit

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 ANNUAL REPORT

Box VIII.6
Kisan Credit Card (KCC) Scheme - National Impact Assessment Survey (NIAS)
Advantages derived from the Scheme • Decline in cost of delivering credit due to simplification
• Augmentation in flow of credit to the agriculture sector. in procedures.
• About 6 per cent decrease in cost of borrowings for Scope for fine tuning
farmers after they were given KCCs. • Banks still impose too many undue restrictions on the
• Cost of borrowings for KCC holders from formal issuance of KCCs.
sources about 3 per cent lower than those for non- • Cardholders are unable to use KCCs in branches other
KCC holders. than the ones issuing them due to the restrictions
• Significant drop in the number of borrowers depending imposed by banks.
exclusively on informal sources for their short-term • Generally, there are no incentives/rewards for timely
credit needs. payments.
• Reduction in cost of borrowings from informal sources • Credit limits sanctioned by banks are largely
by about 3 per cent. inadequate.
• Significant saving in time spent in taking short-term • Awareness/implementation level in respect of the
agricultural loans. Personal Accident Insurance Scheme is quite low.

and 23.7 per cent of the total priority sector advances 4,01,142 (45.8 per cent) belonged to scheduled
as at end-March 2004. 497 specialised SSI branches castes and scheduled tribes, 4,62,230 (52.8 per cent)
were operationalised by banks to implement the policy were women and 8,316 (1.0 per cent) were physically
directive of having at least one such branch in every handicapped. Under the Swarna Jayanti Shahari
district and centre having a cluster of SSI units. Rozgar Yojana (SJSRY), disbursements amounting to
8.44 Credit extended by scheduled commercial Rs. 173.4 crore were made in 58,800 cases (out of
banks to 1,67,980 sick SSI units stood at Rs.5,706 73,877 applications sanctioned) during the year.
crore as at end-March 2003. Of these, 3,626 units Besides, Rs. 12.8 crore were disbursed in 7,429 cases
were found to be viable, with their outstanding bank out of 9,140 applications sanctioned under the
credit at Rs.625 crore (11.0 per cent). Banks placed Scheme of Liberation and Rehabilitation of
993 units involving outstanding credit of Rs.382 crore Scavengers (SLRS) during 2003-04.
(6.7 per cent) under nursing programmes.
8.48 SHGs are considered eligible for financing under
8.45 The Working Group on Flow of Credit to SSI the Prime Minister’s Rozgar Yojana (PMRY), effective
Sector (Chairman: Dr. A.S. Ganguly) submitted its December 8, 2003, provided all members individually
report to the Reserve Bank in May 2004 (Box VIII.7). satisfy the eligibility criteria laid down and total
membership does not exceed twenty. There is also no
Credit to Khadi and Village Industries Commission ceiling on the loan amount. Assistance under the
8.46 A consortium of select public sector banks led Scheme amounted to Rs. 629 crore for 1,04,733
by the State Bank of India was formed to provide credit beneficiaries during 2003-04. Of these, 16,340 (15.6 per
to the Khadi and Village Industries Commission cent of total) belonged to the scheduled castes and
(KVIC) at an interest rate of 1.5 per cent below the scheduled tribes, 15,054 (14.4 per cent) were women
average prime lending rates of five major banks in and 609 (0.6 per cent) were physically handicapped.
the consortium. Out of Rs.738 crore disbursed, an
amount of Rs.342.4 crore was outstanding at end- Differential Rate of Interest (DRI) Scheme
March 2004.
8.49 The outstanding advances of public sector
banks under the DRI Scheme amounted to Rs. 315
Government Sponsored Schemes crore in respect of 3.7 lakh borrowal accounts at end-
8.47 A total number of 8,75,690 Swarozgari s March 2004, forming 0.1 per cent of the total
received bank loans amounting to Rs.1,275 crore (and outstanding advances as at the end of the previous
Government subsidy amounting to Rs. 698 crore) year which were substantially lower than the stipulated
under the Swarnajayanti Gram Swarozgar Yojana target of 1.0 per cent of advances. Banks were
(SGSY) during 2003-04. Of the Swarozgaris assisted, advised to increase their lending under the Scheme.

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 MONETARY AND CREDIT POLICY OPERATIONS

Box VIII.7
Recommendations of the Ganguly Working Group
• Definition of the small and medium enterprises (SMEs) contribute to the corpus of the proposed Technology Bank
sector to be based on turnover. Tiny, small and medium to ensure its commercial viability and play an active role
enterprises could be redefined in terms of limits as under: in enhancing the capabilities and credit worthiness of the
Tiny : Turnover up to Rs. 2 crore; SME sector.
Small : Turnover of above Rs. 2 crore and up to Rs. 10 • Promoting and financing special purpose vehicles (SPVs)
crore; and by banks in the form of micro credit agencies dedicated to
servicing SME clusters. Such micro credit intermediaries
Medium : Turnover of above Rs.10 crore and up to Rs. 50
in the form of NBFCs (funded by individual or a group of
crore.
banks but not permitted to accept public deposits) could
• Lending to SMEs in identified clusters. credit rate and assess risk and serve as instruments for
extending quick credit to SME clusters accredited to them.
• Rating mechanism for designated industrial clusters,
designed jointly by CRISIL, IBA, SIDBI and SSI • Special dispensation for the North-East region and other
Associations. backward areas such as adoption of model of mutual
credit guarantee to address the problem of collateral,
• Measures to promote corporate-linked SME cluster where village council guarantee is available. Coverage of
models by banks and FIs. all SSI units without any ceiling (of Rs.25 lakh) under the
Credit Guarantee Fund Trust for Small Industries (CGTSI)
• Proactive role by CIBIL to serve as an effective
scheme.
mechanism for exchange of information between banks
and financial institutions for curbing growth of non- • Revival of State Financial Corporations.
performing assets in the SME sector. In pursuance of these recommendations, the Reserve Bank
instructed the CIBIL to work out a mechanism, in
• Setting up of a dedicated national level SME Development
consultation with the Reserve Bank, the SIDBI, and the IBA,
Fund by the SIDBI for exclusively undertaking venture
to develop a system of proper credit records to facilitate
and other development financing activities for SMEs.
appropriate pricing of loans to SMEs. A special group is
Banks could also contribute to the corpus created by the
formulating a mechanism for debt restructuring for medium
SIDBI (on risk-sharing basis) or alternatively, set up their
enterprises on the lines of the Corporate Debt Restructuring
own venture financing instruments.
(CDR) scheme.
• Setting up of an independent Technology Bank for the
Reference
SMEs by the SIDBI to facilitate technology transfer and
provide services such as project evaluation, risk Reserve Bank of India (2004), “Report of the Working Group
assessment and mitigation to SMEs adopting new on Flow of Credit to Small Scale Industries Sector”, Reserve
technologies. Besides the SIDBI, banks may also Bank of India Bulletin, August.

Amendment of the NABARD Act, 1981 instalment of deferred interest which is to be waived
8.50 The NABARD Act, 1981 was amended in by banks would be reimbursed by the Government.
September 2003 enabling the NABARD to directly No interest would be charged on the deferred interest
refinance district central co-operative banks (DCCBs). and the balance of the deferred interest would be
This is proposed to be implemented selectively in recovered in reasonable instalments.
respect of DCCBs which comply with Section 11(1)
of the Banking Regulation Act, 1949 (As Applicable Infrastructure Lending
to Co-operative Societies) and cer tain other
conditions. 8.52 The Reser ve Bank extended several
regulatory relaxations for infrastructure financing
Relief for Drought Affected Farmers during the year. These measures, inter alia , included
(i) enhancing the scope of definition of infrastructure
8.51 Repayment of loans by farmers in drought- lending to include construction activities involving
affected districts was deferred during 2002-03. In order agro-processing, supply of inputs to agriculture,
to further mitigate the hardship of farmers in drought- preservation and storage of processed agro-products
affected States, it was decided to waive the first year’s and perishable goods including testing facilities for
deferred interest liability - amounting to 20 per cent of quality and construction of educational institutions and
the deferred interest - on kharif loans completely. This hospitals; (ii) relaxing the prudential single borrower

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 ANNUAL REPORT

exposure limit from 15 per cent to 20 per cent of Monetary Policy Stance for 2004-05
capital funds in respect of infrastructure companies;
8.55 The Reserve Bank’s Annual Policy Statement
(iii) assigning a concessional risk weight of 50 per announced in May 2004 was framed against the
cent on investment in securitised paper satisfying backdrop of a macroeconomic assessment that
conditions pertaining to an infrastructure facility; provided grounds for optimism. Considering the India
(iv) permitting lending to private sector special Meteorological Department’s initial forecast of a
purpose vehicles (SPVs) registered under the normal monsoon and under the assumption of a
Companies Act for directly under taking viable sustained growth in the industrial sector and good
infrastructure projects; and (v) lending to promoters, performance of exports, real GDP growth for 2004-
with certain safeguards and where appropriate, for 05 was placed in the range of 6.5 to 7.0 per cent.
acquiring a controlling stake in existing infrastructure Taking into account the inflation trends and assuming
companies. A Working Group on credit enhancement no significant supply shocks and appropr iate
by the State Governments for financing infrastructure management of liquidity, the inflation rate in 2004-
at the State level was also constituted. 05, on a point-to-point basis, was placed at around
8.53 A critical limitation in extending long-term 5.0 per cent. Given the ‘pass through’ of international
financing for infrastructure by banks is that their price trends to domestic inflation, it was stated that
deposit liabilities are largely short-term. The Reserve the inflation rate during 2004-05 is likely to be
influenced to a significant extent by international oil
Bank, therefore, allowed banks to raise long-term
prices and trends in commodity prices. Consistent with
bonds with a minimum maturity of five years to the
the projected real GDP growth and inflation,
extent of their exposure of residual maturity of more
expansion of money supply (M3) for 2004-05 is placed
than five years to the infrastructure sector.
at 14.0 per cent. Non-food bank credit adjusted for
investment in CPs, shares/debentures/bonds of PSUs
Credit Package to Trade and Industry in the State of and private corporate sector is projected to increase
Jammu and Kashmir by 16.0 – 16.5 per cent. The Mid-term Review of the
8.54 A comprehensive package was framed during Annual Policy would review the macroeconomic
the year to ensure a large flow of credit to trade and developments since the announcement of the Annual
industry in the State of Jammu and Kashmir with Policy and, if necessary, revise the projections.
appropriate changes in the monitor mechanism. The 8.56 Taking into account the assessment of the
package would be operative till end-March 2005. It macroeconomy and assuming no unexpected
covers, inter alia , (i) sanction of increased working ex o g e n o u s s h o ck s o r a d ve r s e i n f l a t i o n a r y
capital facilities; (ii) review of all borrowal accounts developments occur, the overall stance of monetary
within a period of 3 months; (iii) encouraging finance
policy for 2004-05 is: (i) provision of adequate
against accepted hundies (usance bills); (iv) extending
l i q u i d i t y t o m e e t c r e d i t gr ow t h a n d s u p p o r t
c o n c e s s i o n a l s e r v i c e t a r i f f s fo r r e m i t t a n c e s ;
investment and export demand in the economy while
(v) honouring small fixed deposit receipts (up to
Rs.10,000) of Kashmiri migrants at the designated keeping a very close watch on the movements in
branches without verifying details from the branch the price level, and (ii) consistent with the above,
of origin against indemnity bonds, where necessary; while continuing with the status quo , to pursue an
(vi) allowing reschedulement of the repayment interest rate environment that is conducive to
programme in deserving cases; and (vii) extension m a i n t a i n i n g t h e m o m e n t u m o f gr ow t h a n d
of liberal acceptance of credit/line of credit facilities. macroeconomic and price stability.

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