Repo ReverseRepo Rate

RBI accords top priority to inflation management - The Reserve Bank of India (RBI) on Tuesday hiked its indicative short term policy rates by 25 basis points to tame inflation and inflationary pressure. The central bank raised the repo rate — the rate at which banks borrow money from the central bank — by 25 basis points from 6.25 per cent to 6.5 per cent and the reverse repo rate — the rate at which banks park their funds with the RBI — from 5.25 per cent to 5.5 per cent. However, it retained the Cash Reserve Ratio (CRR) at 6 per cent.

Repo (Repurchase) Rate

Repo rate is the rate at which banks borrow funds from the RBI to meet the gap between the demand they are facing for money (loans) and how much they have on hand to lend.

If the RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate.

Reverse Repo Rate

This is the exact opposite of repo rate. The rate at which RBI borrows money from the banks (or banks lend money to the RBI) is termed the reverse repo rate. The RBI uses this tool when it feels there is too much money floating in the banking system.

If the reverse repo rate is increased, it means the RBI will borrow money from the bank and offer them a lucrative rate of interest. As a result, banks would prefer to keep their money with the RBI (which is absolutely risk free) instead of lending it out (this option comes with a certain amount of risk). Consequently, banks would have lesser funds to lend to their customers. This helps stem the flow of excess money into the economy

Reverse repo rate signifies the rate at which the central bank absorbs liquidity from the banks, while repo signifies the rate at which liquidity is injected.

CRR

Also called the cash reserve ratio, refers to a portion of deposits (as cash) which banks have to keep/maintain with the RBI. This serves two purposes. It ensures that a portion of bank deposits is totally risk-free and secondly it enables that RBI control liquidity in the system, and thereby, inflation by tying their hands in lending money.

Sundar Committee

Sundar Committee

According to WHO statistics (year 2002) about 11.8 lakh people die every year in road accidents, the world over, of which 84,674 deaths are reported to take place in India. In 2004 the number of deaths had increased to 92,618. The mortality rate in India is 8.7 per hundred thousand population as compared to 5.6 in UK, 5.4 in Sweden, 5.0 in The Netherlands and 6.7 in Japan. In terms of mortality per 10,000 vehicles, the rate in India is as high as 14 as compared to less than two in developed countries. The cost of road crashes has been assessed at one to two per cent of GDP in developed countries. A study by the Planning Commission in 2002 estimated the social cost of road accidents in India at Rs.55, 000 crore annually (2000 prices), which constitutes about 3% of the GDP. Thus, there is an urgent need to recognize the worsening road safety situation in order to take appropriate action. Road traffic injury prevention and mitigation should be given the same attention and scale of resources that are currently being channeled towards other predominant health issues, if increasing human loss and injury on the roads, with their devastating human impact and large economic cost to society are to be avoided.

With massive investment in roads and the exponential growth in the number of vehicles it has become necessary to have a system, which integrates all disciplines that influence road safety and which at the same time would have linkages with established institutions that cater to the different aspects of road safety viz. engineering, education, enforcement, medical and behavioural sciences.

Constitution of the Committee : On 13th January 2005, the Cabinet Committee on Infrastructure headed by the Prime Minister directed the Ministry of Road Transport and Highways to present a note to the Empowered Committee of Secretaries for the creation of a Directorate of Road Safety and Traffic Management and the amendment of traffic laws as required. Later, an Expert Committee under the Chairmanship of Shri S. Sundar, former Secretary of the then Ministry of Surface Transport, Government of India was constituted to recommend a structure for the organization and advise on its role and functions.

Malegam Committee: MFI

THE Malegam committee has made a brave effort in its report to keep the microfinance industry alive while pacifying politicians in Andhra Pradesh who want to shut the industry down, accusing it of causing suicides. In the process, the committee has fallen between two stools, combining many sensible suggestions with others that are seriously flawed.
Since politicians have accused microfinance institutions (MFIs) of usurious profiteering, the committee suggests an interest cap of 24%. It assumes that MFIs can get funding at 12%. It says the lending margin (difference between an MFI’s borrowing and lending rate) should be capped at 10% for large MFIs with portfolios above . 100 crore, and at 12% for smaller ones. This amounts to a double cap: a 10-12% cap on the margin, plus an absolute 24% lending cap.
Problem: MFIs simply cannot get all their funding at just 12%. The committee has looked at historical data that do not mirror today’s realities. Yes Bank recently raised its interest rate to 17% for one MFI. Other MFIs are negotiating loans at 15-16%. Every time the RBI tightens monetary policy, interest rates go up. How can you cap MFI lending rates when there is no cap on their borrowing rates?
In trying to check profiteering, the committee may kill newer MFIs with high start-up costs, especially those in remote areas most in need of financial inclusion. Such MFIs lose money even with lending rates of 36%. The double cap may squeeze out all but a few large MFIs, including the major culprits of multiple lending and overlending!
The committee fails to address a basic question: why cap the margins and maximum loan of microcredit NBFCs when there is no such cap on other NBFCs? Even banks charge 24-30% forsmallpersonalloanswithoutcollateral. Credit card rates are also 24-30%.
The proposed interest caps are aimed at AP politicians and media critics, who think usurious interest rates are leading to suicides. The committee should have made sample calculations to illustrate the impact of interest rate cuts on the weekly equated installment of borrowers.
Fact is, if interest falls from 30% to 24% for a loan of . 8,000, the weekly installment falls by only . 7! It is absurd to suggest that . 7 per week is the difference between healthy and suicidal borrowing. In the MFI model, the bulk of the weekly installment is principal, and interest is a small component. Any MFI cap needs to be much more flexible than the Malegam norm.
The committee is so anxious to protect borrowers from excessive debt that its recommendations will strangulate small businesses. The committee says total indebtedness should not exceed . 25,000. But many studies the world over show that poor families already have much higher debt levels — loans from friends, relatives, moneylenders and pawnbrokers. No MFI agent visiting a village for half an hour per week can discover the true assets and liabilities of borrowers who have every incentive to hide the truth.
The committee may be right in thinking that consumer debt exceeding . 25,000 can be dangerous — although poor families routinely borrow much more for weddings. The committee wants at least 75% of MFI loans to be for productive purposes. Elementary economics says that money is fungible, and you cannot say how one single element of cash inflow is used for which spending purpose. The IRDP scheme tried to enforce the productive asset clause, so the same buffalo was displayed by every villager wanting a loan. Why aim for a repetition of this farce?
INFLATION means a buffalo costs up to . 25,000, up from . 10,000 not long ago. Soon the proposed combined MFI lending limit of . 25,000 will not buy even for one buffalo. Much worse will be the plight of other small businesses wanting to scale up. Lending norms must be indexed for inflation.
I have heard village women argue that they need . 50,000 for a good shop. They also say the MFI model is terrible for business. If an MFI gives her a loan of . 15,000, she can stock her shop with several items and attract good business. But weekly repayments mean that within six months her net loan is down to . 7,500, so she lacks working capital to stock her shop well. And after 10 months her MFI loan is so small that her shop shelves are half empty. Such people use multiple loans to manage their stocks. The committee fails to recognise either the gross insufficiency of . 25,000 as an enterprise limit, or the rationale of multiple borrowing in some circumstances.
MFIs can be asked to give two classes of loans. One would be small credit loans for consumption. Two would be micro-enterprise loans that can gradually be ramped up to . 2 lakh to enable small businesses to scale up. There is a dire need for microenterprise credit, which banks cannot meet but MFIs can. In Latin America, MFIs lend mainly to microenterprises rather than poor women. Compartamos charges 70% interest and is repaid by microenterprises, unflawed by sorry tales of suicide.
The committee says no MFI should devote more than 10% of its business to activities other than lending. This is plain wrong. MFIs have created a client platform in villages which banks cannot. This platform should now be used for a wide range of services, such as life and health insurance.
Many villagers buy animals, so MFIs should provide veterinary services and insurance. By bulking purchases of basic goods, MFIs can get villagers big discounts to retail prices. Such examples can be multiplied. Instead of aiming for such diversification of MFI services, the committee goes in the opposite direction.
There is no space in a short column to discuss all the other issues, on some which the committee has made sensible suggestions. But the RBI needs to take on board critiques of the report, and amend several recommendations that cry out for change.

Important Commissions and Committee

Janakiraman Committee Report was given by Harshad Mehta scam.