DECEMBER 7, 2003
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Ad Asia 2003
Round-up

The Indian ad industry came back from Jaipur enlightened. True or false? Hmmm. To answer this question, BT Online recounts everything that happened that could have even a marginal bearing on the subject. It would be simpler to answer in a word, but then, this is about advertising...


Q&A:
Christopher Prox

Here's the man famous for advising Nokia to keep its cellphone handsets 'human', on brand innovation.

More Net Specials
Business Today,  November 23, 2003
 
 
Interview with Y.V. Reddy Governor/RBI
"There Will Soon Be Consolidation In The Financial Sector"
 
"What we are trying is to deepen the financial markets. We want savers to keep more money with banks and banks to give out more money"

On November 3, 2003, Yaga Venugopal Reddy, Governor of Reserve Bank of India (RBI), presented his maiden monetary and credit policy. The policy, though not dramatically different from that of his predecessor since interest rates have remained unchanged at 6 per cent, seeks to move the central bank's focus away from merely managing liquidity and emphasises the need to offer special credit delivery mechanisms to small-scale industries and agriculture. The 60-year-old Reddy, who is known to be a man obsessed with details, is only too aware of the limits of the monetary policy in an economy such as India's and is keen to bring the longer-term structural issues to the top of RBI's agenda. Reddy talked to Business Today's on the need for continuity and change in the central bank policies. Excerpts:

Your policy statement seems to be a continuation of RBI's earlier stance. The decision to maintain status quo on interest rates seems to reflect a wait-and-watch approach on your part to the economy...

That's right...continuity with change as well as wait and watch. When things are fine, you just wait. At the same time, you watch. You watch to see if things get better when you do something or if there is some new development that calls for re-orienting our approach. In that sense, I would emphasise more on watching than on waiting.

What developments could make a review of the existing policy necessary?

As you would have noticed, there are broadly three or four such elements the policy has tried to deal with. One is structural. As far as structural changes are concerned, it is more of a wait till our studies give us more ideas and definite plans to move on. Second, in prudential matters there are the regulatory and supervisory issues pertaining to development financial institutions and preparing banks for the adoption of the New Basel Capital Accord. Our approach here is neither wait nor watch, but to keep working on an ongoing process.

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Lastly, there are financial markets, where watching is very important. There can be global or domestic uncertainties. Uncertainties in the financial market may emanate due to non-financial market risk or there could be a shock resulting from non-economic policy risk. So you need to be constantly vigilant. Usually, monetary measures may be linked to unexpected events where watching is important.

And then, you have broad indicators and assumptions for various global and domestic policy parameters like domestic growth rate, inflation, global economic recovery, and global monetary policy stance. Here, we wait and watch in equal measure, to see if anything is going to change. So, on the whole, I would say it is really more of watch than wait.

The policy emphasises on credit delivery. What are you doing to improve credit pricing transmission of lower interest rates to sectors other than housing? Would the benchmark prime lending rate (PLR) be a step in that direction?

First, the relationship between price of credit and demand for credit is not one to one. In the past, when price of credit was high, interest rate, both nominal and real, was high and credit still grew. In recent years, real interest has been low, price has been low, and yet credit has not grown. But price of credit is an important factor, an enabling factor, both for credit offtake and competitiveness. Second, anything in excess can be bad. If you price the credit too low, it may then go to places it need not go to. If you price credit too low, then savers may not save. So you are really talking of balance in the aggregate.

"Since the RBI is banker to the government, it becomes necessary for it to ensure that banking services are provided with maximum efficiency"

Broadly speaking, what this monetary policy is saying is that in terms of overall liquidity and overall price, the current scenario appears to be fine. Having said that, in some sectors where credit should have gone, there are institutional and structural problems that need to be taken care of. Similarly, unless you have administered interest rates, rates will vary.

The benchmark PLR should be treated as a process by which we are encouraging transparency. So if the bank lending the money and the borrower taking the money know on what basis this pricing is done and how different customers are getting different terms, there would be enough information to make the transaction reasonable. That is why I am trying to bring about some systems improvement. Indian Banks' Association has offered to work on PLR and fair trade practices.

You have revised your estimate for gross domestic product (GDP) growth, how do you see this translating into growth in credit demand?

Just because GDP is growing, credit need not grow. What we are trying to do is to widen and deepen the financial sector. In a dynamic sense, we want savers to keep more money with banks and banks to give out more money. Contextually, we feel that in the recent past, credit growth did not happen even though liquidity was adequate and the rates reasonable. Mainly because corporates were focussing more on improving productivity than on new investments. We expect credit growth to pick up because corporates who have maximised their productivity gains will hopefully start investing again. We expect infrastructure investment to rise along with increased credit demand from small and medium enterprises. I feel credit growth will pick up very soon.

The credit policy has asked the banks to ensure that they hedge any forex loans of above $10 million that they make to corporates. How do you plan to enforce this?

It is not meant to be enforced. We are not saying that everybody who borrows must hedge. When corporates borrow in foreign currency, it may entail risks to their balance sheets if there are major currency fluctuations. Then, to the extent that the banks lend to such corporates, the quality of assets of banks may get affected. So we told the bank boards to ensure hedging of such loans as a matter of policy. On the other hand, if the banks feel that the corporates they are lending to are sophisticated enough and that such fluctuations won't affect their balance sheets, they can ignore our advice and just go ahead.

Select private banks will now be allowed to provide services to the government. Will this not impact the performance of public sector banks that make good money from this business?

The question here is once you have accepted in principle that there should be more competition, it should be applied across the board. And since the RBI is banker to the government, it becomes necessary for it to ensure that banking services are provided to the government with maximum efficiency and at minimum cost. Earlier, this was restricted to public sector banks and commission was calculated in a particular way. This had to change as some new private sector banks went ahead and adopted new technology and are now in a position to provide better service.

Do you see consolidation happening in the banking sector? Could you give us an idea of how many banks we should have?

It is an evolving situation. Compulsions of competition, compulsions of technology and compulsions of handling innovations in financial sector will soon require some sort of consolidation in the financial sector. In what shape it will come will depend on individual banks and their dominant owners.

 

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