Banking and capital markets are areas in which reforms have continued in 1996
despite political uncertainty and change, reflecting one of the advantages of relatively
autonomous regulators (RBI and SEBI). The RBI ushered in significant monetary policy
changes and reforms in April and July 1996. Interest rates on domestic bank deposits
above one year and on NRER deposits above two years have been de-controlled. The
minimum maturity of bank time deposits has been reduced from 46 to 30 days. SLR on
outstanding NRER deposits has been reduced from 30 per cent to 25 per cent. Banks are
now required to mark to market 50 per cent of their investments in approved securities,
up from 40 per cent earlier. The loan component of bank credit has been raised from 40
per cent to 60 per cent of maximum permissible bank finance (MPBF) for those with
limits of Rs.20 crores or higher (the remaining 40 per cent stays on a cash-credit system).
For those with MPBF limits of Rs.10 to 20 crores the loan component will be 40 per
cent. Access to money market mutual funds (MMMFs) has been extended to corporates
and others as in the case of other mutual funds. Six institutions have been given approval
(effective 1st June, 1996) by RBI to become primary dealers in government securities.
SEBI-approved mutual funds dedicated to government securities will receive liquidity
support from RBI up to 20% of their investment. Selective credit controls have been
relaxed on cotton and kapas, sugar, gur and khandsari in the context of abundant supply.
Call money rates which had declined to around 11 per cent after the April, 1996 slack
season credit policy, have declined further after the July policy announcements,
suggesting an easing of short term liquidity. Forward exchange rates have mirrored this
downtrend, reflecting improved expectations about the growth and stability of the
economy and foreign exchange markets.
The pace of reform in the capital markets has also been maintained in 1996. The
SEBI guidelines on primary issues of debt were modified to allow development finance
institutions to utilise the funds raised even before the allotment/listing of the instruments.
Eligibility norms were introduced to improve the quality of new issues. The track record
for public issue of equity or convertible securities was, therefore, modified as follows: (a)
a non-manufacturing company must have a three year dividend payment record; (b) a
manufacturing company must either meet the dividend condition or have been appraised
by a public financial institution/SCB which also takes a 5 per cent share in loan or equity.
Extensive reforms in regulations for mutual funds have been proposed in the form of a
discussion paper which has been widely discussed and commented upon. Based on these
discussions existing regulations will be amended and are likely to be issued shortly.
New guidelines were issued for Euro issues in June 1996, carrying forward the
process of liberalisation. Banks, Financial Institutions and Non Banking Finance
Companies registered with the RBI were permitted access to GDR markets. GDR issue
proceeds were permitted to be deployed for investments in joint ventures and wholly-
owned subsidiaries in India by parent companies, in addition to end uses earlier allowed.
Use of GDR proceeds for investments in stock markets and real estate were expressly
banned. The end use restrictions on proceeds of foreign currency convertible bonds
(FCCBs) were also liberalized. Under the new guidelines there is no limit on the number
of Euro issues a company or group may float. Furthermore, the three year track record
requirement of good performance by the issuing company can now be relaxed for
financing investments in infrastructure sectors, such as power generation, telecom,
petroleum exploration and refining, ports, airports and roads.