BOMBAY: The Reserve Bank of India has made a strong case for speeding up financial sector reforms in the light of the securities scam. As part of the reforms process, the RBI says in its annual report for 1991-92 that it is also undertaking a fresh look at its own operations and organizational structure and staffing pattern.

Emphasizing the need for reforms, the RBI says that recent irregularities in the financial sector can never be attributed to financial reforms, since such measures were intended to enforce better financial discipline. The securities scandal, though unfortunate, did not put back the clock on reforms, it says. It had, in fact, helped the financial system to become stronger and efficient by undertaking appropriate follow up measures.

While dealing with the issue of reforms, the RBI report highlights the need for strengthening the fragile banking system. The RBI has set out norms on capital adequacy, income recognition and provisioning for commercial banks in order to infuse a dose of health into the system. Since a massive sum would be required for this purpose, the banks would not be forced to raise money from the public for the Government nor can the RBI meet this requirement without obvious deleterious effects on the economy.

According to the report, the RBI’s modernizing its operations besides instituting a strong supervisory authority with powers of comprehensive supervision over banks, financial institutions and nonbanking financial companies.

The objective of the RBI and the Central Government was to restore confidence, both in India and abroad, in the country’s financial system which would become stronger and more   efficient by undertaking appropriate follow up measures in the light of recent “unfortunate episode,” says the RBI report.

Explaining why the irregularities were not attributable to the liberalization process, the report says that the policies of stabilization and structural adjustment began towards the end of June 1991. Secondly, the liberalization process so far had essentially been concerned with fiscal correction, industrial licensing, trade reforms, exchange rate adjustment and rectification of the balance of payments disequilibrium, it says.

Thirdly, the instruments of monetary policy were tightened in 1990-91 and the first half of 199192 more than ever before with the highest interest rates on bank lending’s and severe restrictions on bank credit so as to restrain aggregate demand in the economy in general and import demand in particular,

It was also significant to note that all types of banks and financial institutions public, private, foreign and cooperative had been involved in the “recent episode,” the report adds.

With the vast growth and diversification of the financial system, the system had now entered a phase of development where further progress was possible only if its efficiency, productivity and profitability were considerably and rapidly improved, The medium term objective was to put in place a credible and coherent system of financial reform.

The RBI has once again expressed grave concern over the persistence of considerably higher than targeted levels of net RBI credit to the Center and the budgetary deficit. A sharp reduction in the overall money supply to less than 11% as compared to 18.5% is very crucial to the economy. The possibility of supply shortages due to reduced agricultural out put and their consequences on the inflationary situation warrant considerable, the RBI warns,

The reduction in money supply depends on gross fiscal deficit and monetized deficit. During the first four-and-a-half months of 199293, the budget deficit has been much higher as compared with its levels in the previous year, it points out.

Article extracted from this publication >> September 18, 1992