Mumbai, Oct 23: The forthcoming busy season credit policy should contain measures to prime-pump the economy and at the same time achieve the objectives of economic stability and industrial growth while managing inflation, an apex chamber has said.The Confederation of Indian Industry (CII) has suggested a cut in the cash reserve ratio (CRR) and the bench-mark rate, review of priority sector lending norms and deepening structural reforms in the banking sector by the Reserve Bank of India (RBI) in the busy-season credit policy to be announced on October 30. The RBI can assist in the development of capital markets by allowing banks to invest in primary equity markets subject to a ceiling of 5 per cent of a banks investments, it said. Funding of shares for takeovers and acquisitions should be allowed and grant of loans against shares should be relaxed fully so that shares could be treated like any other assets.The cost of capital should be contained by reducing the spread between the interest and theinflation rate, since it affects the viability of various projects, CII said in a statement here today.High cost of credit was deterring the domestic industry from gaining a cutting edge in a fiercely competitive environment and was also affecting the viability of projects, it said. These would help in controlling the overall liquidity in the economy, it said.CII also called for devising a mechanism to ensure bank finance to small and medium companies without being constrained by tight accounting norms regarding non performing assets, collateral security and margin requirements. It has recommended speedy implementation of vsat based linkages for banks in all major locations in the country to facilitate electronic and immediate transfer of funds.To develop the inter-bank term money market and the derivatives market, CII has suggested a review of the minimum reserve required under the RBI Act and provide for two-way quotes by banks for different tenors in the inter-bank market.With the developmentof a term money market and phased introduction of capital account convertibility the necessary prerequisites for development of a derivatives market would be in place.CII has also suggested that corporates be allowed to participate in repo facility and the bank deposit period should be reduced to 7 days from the present 15 days. Commercial paper (CP) should be made independent of maximum permissible bank limits (MPBF) and corporates should be allowed to freely issue CPs under periodic intimation to banks instead of repeatedly approaching the lead bank for approval.RBI should issue inflation index bonds more often as there was a massive latent demand for such products in the domestic debt market from safe investors like provident funds and households, CII said. Non-performing assets, a major problem faced by the Indian banking industry can be solved by putting in place a high quality appraisal system, putting in place a separate debt recovery act and special courts at important locations in the country,it said.This ``quick recovery'' legal system would not only put to use idle assets, but would also put assets to use with better efficiency, it said. CII has suggested revision of bankruptcy laws and said the government should loosen their grip on banks to improve their efficiency and equip them with the requisite infrastructure to compete in an increasingly integrated financial market.
