MONETARY AND BANKING DEVELOPMENTS3In the context of its monetary and credit policyfor the current financial year, the Reserve Bankof India (RBI) indicated broad money (M3) growthfor 1999-2000 in the range of 15.5 to 16.0 percent.As on January 14,2000, the year-on-year M3growth was 16.6 percent as against 20.5 percentas on the corresponding date of the previousfinancial year. The relatively higher M3 growth inthe last financial year reflected the inclusion ofthe proceeds from the Resurgent India Bonds(RIBs), which became part of the broad moneystock with effect from end-August 1998. Thegrowth in M3 at 12.0 percent till January 14, 2000in the current financial year was also well belowthat at 13.7 percent in the corresponding periodof the previous financial year. The relatively lowerM3 growth in the current financial year till January14, 2000 reflected the decline in reserve moneyby 0.1 percent as against an increase by10.7 percent in the corresponding period of1998-99. The decline in monetary base, in turn,resulted from the relatively negligible growth inGovernments monetised deficit and the declinein RBIs claims on banks and commercial sectorduring this period.3.2 The growth in non-food credit fromcommercial banks to commercial sector tillJanuary 14, 2000 was higher at 10.6 percent thanthat at 7.2 percent in the corresponding periodof the previous financial year. The total flow offunds from commercial banks to commercialsector consisting of both non-food credit andinvestment in debt/equity instruments of thecorporate sector comprising both publicand private sector units increased by11.6 percent during this period as against10.0 percent in the corresponding period of1998-99.3.3 During April-December,1999 sanctions byAll-India Financial Institutions (AIFIs) increasedby 15.5 percent as against 26.0 percent in thecorresponding period of 1998. Disbursementsby AIFIs increased by 17.2 percent during thesame period as against 13.6 percent during thecorresponding period of the previous financialyear.3.4 As part of the efforts to further strengthenprudential norms, the risk weight of 2.5 percentfor investments in government and otherapproved securities has been extended to coverall investments, including securities outside theSLR, with effect from the year ending March31,2001. With a view to facilitating speedierrecovery of debt, the Recovery of Debts Due toBanks and Financial Institutions (Amendment)Ordinance, 2000 was promulgated onJanuary 17, 2000. The process of interest ratederegulation has been carried further by allowingbanks (a) to operate different PLRs for differentmaturities, (b) to offer fixed rate for all terms loanssubject to the Asset-Liability ManagementGuidelines, (c) to charge interest rates on loansto micro-credit organisations as per normalpolicy and (d) to charge interest rates withoutreference to PLR in respect of loans covered byrefinancing schemes of term-lending institutions,lending to intermediary agencies, includinghousing finance intermediary agencies,discounting of bills and advances againstdomestic/NRE term deposits and FCNR(B)deposits.433.5 The Reserve Bank introduced an InterimLiquidity Adjustment Facility (ILAF) in place of theGeneral Refinance Facility with effect from April21,1999, as an interim arrangement aimed atfacilitating the transition to a full fledged LiquidityAdjustment Facility on the lines suggested by theNarasimham Committee (II). Some measureswere also taken to further deepen the moneymarket, namely, access to repo markets to selectnon-bank institutional participants, and extensionof cheque writing facility to Money Market MutualFunds (MMMFs), Gilt Funds, and Liquid IncomeSchemes of Mutual Funds with predominantinvestment in money market instruments. Toenable the banks, AIFIs and Primary Dealers(PDs) to hedge interest rate risks, RBI allowedInterest Rate Swaps (IRS) and Forward RateAgreements (FRAs).3.6 In line with the monetary policy stance offacilitating adequate availability of credit tosupport industrial recovery, the Cash ReserveRatio (CRR) was reduced by 0.50 percentagepoint to 10 percent with effect from the fortnightbeginning May 8, 1999,and further down to 9percent in two phases of half-a-percentage pointeach with effect from November 6,1999 andNovember 20, 1999 respectively. Theincremental CRR of 10 percent on increase inliabilities under the FCNR(B) scheme was alsowithdrawn with effect from November 6,1999. Inaddition, the interest rate surcharge of 30 percenton import finance was withdrawn so as to reducethe financing costs of imports for industry.Keeping in view the urgent national need to speedup infrastructure development, operationalguidelines on financing of infrastructure projectshave been issued to enable banks and FIs tosanction term loans for technically feasible,financially viable and bankable projects taken upby both the private and public sectorundertakings. In order to encourage the flow offinance for venture capital, it has been decidedthat the overall ceiling of investment by banks inordinary shares, convertible debentures, units ofmutual funds, etc. of 5 percent of their incrementaldeposits of the previous year would standautomatically enhanced to the extent of banksinvestment in venture capital. With a view toencouraging credit flow from non-banking financial companies (NBFCs) the ceiling on bankcredit linked to net owned fund (NOF) wasremoved in respect of NBFCs, which arestatutorily registered with RBI and which areengaged in the principal business of equipmentleasing, hire-purchase and loan and investmentactivities. As low level of capitalisation adverselyaffects the ability of NBFCs to withstand cyclicalfluctuations in business, NBFCs with NOF belowthe prescribed minimum level of Rs. 25 lakh havebeen asked to achieve the stipulated level byJanuary 8, 2000 for the purpose of registration.

Monetary and Credit Policy3.12 Though M3 growth exceeded projectedlevels during each of the previous three years,the monetary and credit policy for 1999-2000indicated the desirability of aiming at a lower M3growth in 1999-2000 than the rate of growth of15.0 to 15.5 percent projected for the previoustwo years. However, keeping in view the likelyadverse impact of an unduly restrictive monetaryand credit policy on Governments marketborrowing requirements as well as on the generalgrowth prospects, RBI indicated a marginallyhigher M3 growth in the range of 15.5 to 16.0percent for 1999-2000.The broad money growthof 15.5 16.0 percent indicated for 1999-2000assumes a GDP growth rate of 6-7 percent andan inflation rate of about5 percent per annum. The yearon year growthin M3 as on January 14, 2000, was16.6 percent, which was more than the projectedrange of M3 growth. Consistent with the projectedM3 growth, RBI has given expansion in aggregatedeposits of scheduled commercial banks (SCBs)at Rs. 1,18,500 crore or16.5 percent in 1999-2000 over 1998-99.However, as on January 14, 2000, the year-onyeargrowth in aggregate deposits of SCBs wasmarginally lower at 16.2 percent. Non-food bankcredit including investments in commercialpapers, shares/debentures/bonds of PSUs andprivate corporate sector has been projected byRBI at 18 percent in 1999-2000. The observedyear-on-year growth in the total flow of fundscomprising non-food credit and investment in thedebt/equity instruments was 18.1 percent as onJanuary 14, 2000. Availability of credit of theprojected order is expected to cater to the creditrequirements of the productive sectors of theeconomy.3.13 The financial sector reforms announcedas part of the monetary and credit policy for 1999-2000 (Box 3.2) include the interim liquidityadjustment facility (ILAF) through repos andlending against collateral of Government of IndiaSecurities (Box 3.3), and introduction of rupeederivatives to enable market players to hedgeinterest rate risks. In order to ensure adequateliquidity for promoting industrial revival, the policystatement also announced reduction in CRR to10.0 percent with effect from the fortnightbeginning May 8, 1999.The mid-term review ofmonetary and credit policy for 1999-2000announced further reduction in CRR by1 percentage point in two phases involvinghalf-a-percentage point reduction each with effectfrom the fortnights beginning November 6 andNovember 20, 1999 respectively.Multiple Indicators and Instruments3.14 Experience in monetary managementduring 1998-99 revealed the need for monitoringa multiple set of indicators for the conduct ofmonetary policy, especially in the context of asignificant increase in volatility of the exchangerate, a spurt in inflation rate for most part of theyear (mainly caused by adverse supply shocks),and a slow down in industrial growth. Monetarypolicy is implemented through a network offinancial intermediaries and markets. In acomplex financial system, the effects ofmonetary policy on output and inflation aretransmitted through various segments of thefinancial markets, by way of changes in interestrate, exchange rate and other asset prices aswell as changes in the volume of money andcredit in economy. The precise way in whichpolicy actions feed through the financial andeconomic systems represents the transmissionmechanism while the various effects constitutethe channels of policy. In India, the transmissionmechanism and channels have been influencedby gradual financial sector liberalisation involvingincreasing exposure of the balance sheets ofbanks and corporates to market forces, steadydiffusion of financial innovations, growing degreeof openness of the economy and liberalisationof domestic product and asset markets. Thesedevelopments and the need to coordinatebetween the short-term objective of marketstabilisation and the long-term objective ofgrowth and inflation control have warranted anapproach based on a multiple set of indicators.The projected M3 growth, which provides a broadindicator of the stance of liquidity conditions, hasbeen supplemented by other indicators such asinterest rates, exchange rate, fiscal and externalpositions and flow of financial resources forpurposes of monetary management. Themultiple indicator approach has the advantagesof broad-basing monetary policy operations ona large set of information and providing flexibilityin the conduct of monetary management. TheReserve Bank has been using both direct andindirect instruments in the conduct of monetarypolicy, though the reliance on the former hasbeen gradually brought down with a growingimportance of the Bank Rate, repo rate and openmarket operations in recent years.High Monetary Growth vis--vislow inflation3.15 The inadequacy of exclusive reliance onbroad money growth is also reflected in thecoexistence of high monetary growth and lowinflation. A number of factors explain thisphenomenon. First, preliminary empiricalevidence in the Indian context indicatesconsiderable lag in the transmission of monetarypolicy. Secondly, the recent episode of lowinflation appears to be a new phenomenonbecause the average decadal inflation rate inIndia moved in a narrow range from 8.0 percentto 9.0 percent during 1970-71 to 1998-99. Thirdly,the intra-year movement in inflation rate during1998-99 involved two distinct phases:(a) seasonal price rise during April toSeptember,1998, largely contributed by the pricerise in primary articles accounting for nearly onethirdof the total weight of WPI, and (b) a gradualfall since October, 1998. Greater competitionfrom imports and sharp decline in worldmanufacturing prices have also contributed tolow inflation.Interest Rates3.16 Keeping in view the overall improvementin market conditions, RBI announced in MarchBOX 3.2Monetary and Credit Policy Measures : 1999-2000A. April-September, 1999l CRR reduced from 10.5% to 10.0% w.e.f. May 8,1999; lendable resources of banks increased byRs. 3250 crore.l Interim Liquidity Adjustment Facility (ILAF) throughrepos and lending against collateral of Governmentof India Securities has replaced the generalrefinance facility w.e.f. April 21, 1999.l UTI, LIC, IDBI and other non-bank participantsallowed to access money market for short termliquidity through repos so as to enable them to exitmoney market in a planned/gradual way.l MMMFs allowed to offer Cheque writing facility toinvestors.l Guidelines for interest rate swaps and forward rateagreements issued.l Operational guidelines issued to SCBs and AIFIs forfinancing of infrastructure projectsl Banks allowed to operate different PLRs for differentmaturities.l Banks allowed to offer fixed rate for all term loansin conformity with ALM guidelines.l Wherever the deposit rate is in excess of PLR,advances to depositors against fixed deposits bybanks allowed without reference to PLR ceiling.l Board of Directors allowed to delegate necessarypowers to ALM Committee for fixing interest rates ondeposits and advances, subject to reporting to theBoard immediately thereafter.l With effect from the year ending March 31, 2000,banks advised to classify a minimum of 75% of theirsecurities as current investments.l Banks/FIs investment in Tier-II Bonds issued byother banks, subjected to a ceiling of 10% of banks/FIs total capital.l Board of Directors allowed to prescribe detailedrules for determining the date of commencement ofcommercial production.B. Mid-Term Reviewl CRR reduced from 10% to 9% in two installmentsof half-a-percentage point each with effect fromNovember 6 and November 20, 1999 respectivelyincreasing lendable resources by Rs. 7000 crore; alag of two weeks in the maintenance of stipulatedCRR by banks introduced.l The minimum maturity of FCNR(B) deposits raisedfrom six months to one year.l Incremental CRR of 10% on increase in liabilitiesunder FCNR(B) Scheme (over the level as on April11, 1997) withdrawn w.e.f November 6, 1999increasing lendable resources by Rs.1061 crore.l Interest rate surcharge of 30% on import financewithdrawn.l The minimum rate of 20% interest on overdue exportbills withdrawn; banks allowed to decide appropriaterate of interest on overdue export bills.l Permission granted to non-bank entities to lend inthe call/notice money market by routing theiroperation through PDs extended up to June, 2000.l MMMFs brought within the purview of SEBIRegulations; banks and FIs required to seekclearance from RBI for setting up MMMFs; MMMFsto be set up as separate entities in the form of Trustsonly.1999 a package of measures aimed at loweringinterest rates in the economy against thebackdrop of an enabling environment created bythe Union Budget for 1999-2000.The RBI packageconsisted of reduction in Bank Rate by onepercentage point from 9 percent to8 percent, reduction in the fixed rate repo from8 percent to 6 percent, and CRR reduction from11 percent to 10.5 percent. These measures inturn led to a sharp decline in the cut-off yields on14-day, 91-day and 364-day Treasury Bills.Interest rates in the credit market reflected thetrends in the government securities and moneymarkets. The credit market rates moved in linewith the funds position, which was generally easyowing to sluggish growth in demand for credit.As regards the short end of the market, repo rateand the Bank Rate are now perceived by themarkets as signals for movements in interestrates, particularly the call money rates. The ILAFhas also helped in keeping the money marketinterest rates range-bound. The significantimprovement in liquidity conditions during thecurrent financial year has averted upwardpressure on interest rates. The trends in interestrates may be seen from Table 3.4.BOX 3.3Interim Liquidity Adjustment Facility (ILAF)In line with the recommendation of Narasimham Committee (II) to provide RBI support to market throughliquidity adjustment facility involving periodic/daily resetting of Repo and Reverse Repo Rates, RBI introducedILAF with effect from April 21, 1999 in place of the General Refinance Facility. Pending the upgradation oftechnology and legal/procedural changes required to switch over to a system of electronic transfer and settlement,ILAF through repos and lending against collateral of Government of India securities would serve as an interimarrangement towards the transition to a full-fledged liquidity adjustment facility. This facility enables RBI to injectliquidity into the market at various interest rates, and absorb it, whenever necessary, at the fixed repo rate soas to promote stability in money market interest rates. The fortnightly average utilisation under ILAF, includingexport credit refinance, ranged between Rs. 4119 crore and Rs.8,476 crore during April-December 3,1999. ThePrimary Dealers (PDs) availed the liquidity facility within their overall limits., and their daily outstanding rangedbetween Rs. 86 crore and Rs. 8025 crore during the same period. In practice, ILAF is operated through acombination of repo, collateralised lending, OMO and export credit refinance. The main features of ILAF are:l Collateralised lending facility (CLF) upto 0.25 percent of the fortnightly average outstanding aggregatedeposits in 1997-98.l CLF available for two weeks at the Bank Rate.l Additional collateralised lending facility (ACLF) for an equivalent amount of CLF available at Bank Rate plus2 percentage points.l CLF and ACLF for beyond two weeks subject to an additional rate of 2 percent.l Cooling period of two weeks after CLF/ACLF at penal rate (since dispensed with based on feedback frommarket participants).l To facilitate systematic adjustment in liquidity, restriction on participation in money market (during the periodof availing liquidity) withdrawn.l Scheduled commercial banks eligible for export credit refinance facility at the Bank Rate with effect fromApril 1, 1999.l Liquidity support against the collateral of Government securities, based on bidding commitment and otherparameters available to PDs at Bank Rate for a period of 90 days.l Additional liquidity support against Government securities to PDs for two weeks at the Bank Rate plus2 percentage points.l Absorption of liquidity in the market would continue to be in the form of fixed rate repos.l The above mentioned facilities to be supplemented by OMOs by the RBI.TABLE 3.4Interest Rate Trends(Per cent per annum)As onInterest Rate 22-1-99 3-4-99 21-1-20001. Bank Rate 9.00 8.00 8.002. MTLR 14.00 13.50 13.503. PLR 12.75-13.00 12.00 - 12.50 12.00 - 12.504. Deposit Rate 9.00-11.50 8.00 - 10.50 8.00 - 10.505. Call Money 8.50 - 35.00 7.75 - 8.60 7.90 - 8.50(low/high)6. CDs 8.50-17.501 8.00 - 12.502 8.50 - 11.0047. CPs 9.80-13.001 9.10 - 13.253 9.05 - 11.655MTLR : Medium Term Lending Rate (IDBI's rate)PLR : Prime Lending Rate (5 major public sector banks)

1. As on 15-1-1999 2. As on 26-3-1999 3. As on 31-3-19994. As on 17-12-1999 5. As on 15-1-2000Non-banking Financial Companies(NBFCs)3.31 NBFCs have registered significant growthin recent years both in terms of number andvolume of business transactions. NBFCs arepurveyors of credit to the sectors where creditgap exists. The equipment leasing and hirepurchase finance companies finance productiveassets. Their role in financing consumer durablesand automobiles by aggressive lending is wellknown.Their growth has been fuelled by policychanges in the auto and consumer durablesectors. However, the rapid growth in thebusiness of NBFCs also brought in its wake theneed for effective regulatory action to protect theinterests of investors.3.32 The Reserve Bank has started regulatingthe activities of NBFCs with the twin objectivesof ensuring that they subserve the financialsystem efficiently and do not jeopardise theinterest of depositors. In the backdrop of generalsickness in the real estate market and some ofthe industrial activities coupled with steep declinein the value of some of the unquoted shares, theNPAs of NBFCs have registered an upwardtrend. The profitability of NBFCs has generallycome under strain due to mandatory provisioningrequirements against NPAs. The provisions inthe RBI Act which, till recently were consideredinadequate to deal with the growing number ofweak and unscrupulous players, were expandedin January, 1997, vesting considerable powerswith the Reserve Bank. RBI has put in place acomprehensive regulatory and supervisoryframework in order to discharge the heavystatutory responsibilities cast on it with a view toproviding indirect protection to the depositorsinterest and strengthening the NBFC sector.Registration is being granted to NBFCs onassessment and evaluation of various factorsand as per the criteria laid down in the RBI Act.The applications for registration are subjectedto thorough scrutiny. RBI has issued uptoNovember 30, 1999, approvals for registrationof 641 NBFCs which are permitted to acceptpublic deposits and to 7322 NBFCs which arenon-public deposits taking companies. RBI hasrejected the applications of 1370 NBFCs for thegrant of such registration. The applications of26,744 NBFCs are, however, pending becausethese companies do not have the prescribedminimum net owned fund of Rs. 25 lakh. Theseapplications were, however, subjected tothorough scrutiny. The aggregate public depositsas reported by 1724 NBFCs stood at Rs. 20,237crore as on March 31, 1998, which constituted3.4 percent of the aggregate deposits ofcommercial banks. The requirement of minimumNet Owned Fund (NOF) for any company seekinga Certificate of Registration to commence thebusiness of an NBFC on and from April 21, 1999has been raised from Rs. 25 lakh to Rs. 200lakh.3.33 RBI closely supervises those NBFCs,which accept public deposits, through acomprehensive mechanism comprising on-siteexamination, off-site surveillance, a sensitivemarket intelligence system and initiation ofnecessary supervisory action whenevernecessary. The statutory auditors of NBFCs havebeen directed to report exceptions to compliancewith RBI regulations to the Reserve Bank directlyfor punitive action. RBI has undertaken publicitycompaign through print media all over the countryto create awareness among the public aboutdos and donts in regard to making deposits withNBFCs. RBI has also been coordinating itsefforts with State Government authorities andother enforcement bodies for checkingunscrupulous activities of NBFCs andunincorporated bodies accessing public depositsillegally. At the same time, the well-run andmanagerially sound NBFCs are beingencouraged to continue their genuine businessoperations. Bank credit to the NBFCs for theiradvances against commercial vehicles hasrecently been brought under the ambit of prioritysector advances. The earlier ceilings on bankcredit to NBFCs as a multiple of their NOFhave been abolished for NBFCs registered withRBI. 42All India Financial Institutions (AIFIs)3.34 Recent years have witnessed a blurringof the barriers between banks and AIFIs. Whilebanks have entered the domain of projectfinancing, AIFIs have entered the area of workingcapital financing. Until the long term debt marketin India registers significant improvement interms of both depth and liquidity, AIFIs would,however, continue to play a leading role in givinglong term credit. During April-December1999-2000, the sanctions by AIFIs increased by15.5 percent as against 26.0 percent in thecorresponding period of the previous financialyear. During this period, the disbursements byAIFIs increased by 17.2 percent in contrast to13.6 percent in the corresponding period of theprevious financial year. Both sanctions anddisbursements by Investment Institutionsregistered significant increase duringApril-December, 1999-2000 (Table 3.9).TABLE 3.9Assistance by AIFIs(Rs. crore)Institution 1998-99 April-December1998-99 1999-2000A. Sanctions(a) DFIs 79726 56822 62358(20.3) (27.5) (9.7)(b) Investment 10151 5623 9760Institutions (8.9) (12.7) (73.6)AIFIs (a+b) 89877 62445 72119(18.9) (26.0) (15.5)B. Disbursements(a) DFIs 46483 30519 34134(7.5) (14.0) (11.8)(b) Investment 9721 5907 8552Institutions (12.9) (11.5) (44.8)AIFIs (a+b) 56204 36426 42686(8.4) (13.6) (17.2)Note : Figures are provisional; those in brackets denotepercentage increase over the corresponding previousperiod. Credit Delivery System3.25 Efforts to streamline the credit deliverysystem gathered further momentum in thecurrent financial year. The coverage of Prioritysector has been widened further by includingincremental credit given by banks to NBFCs foron-lending to small road and water transportoperators and to units in the tiny sector of industry.Investment in venture capital has also beenincluded in the priority sector. Keeping in viewthe national importance of infrastructuredevelopment, guidelines for financinginfrastructure projects have been issued to banksto enable them to sanction term loans fortechnically feasible, financially viable andbankable projects taken up by both the privateand the public sector undertakings. Four broadmodes of financing have been identified in thiscontext, namely, (i) financing through funds raisedby way of subordinated debt, (ii) take-outfinancing, (iii) direct financing through rupee termloans, deferred payment guarantees, foreigncurrency loans, etc. and (iv) investments ininfrastructure bonds issued by project promoters/financial institutions. In order to enhance thecapacity of the Small Industries DevelopmentBank of India (SIDBI) to cater to the financialneeds of the small sector, the SIDBI Bill raisingSIDBIs authorised capital to Rs. 1000 crore withan enabling provision to further increase it up toRs. 2000 crore was passed by the Lok Sabha inthe current financial year.Sectoral Deployment of Bank Credit3.26. The details of sectoral deployment of bankcredit may be seen from Table 3.8. During1998-99, out of the total increase in non-foodgross bank credit amounting to Rs.37398 crore,40.4 percent flowed to priority sectors comprisingagriculture, small scale industries and otherpriority sectors while 34.7 percent flowed toindustry (medium and large). The sectoral breakupof credit for the periodApril-October, 1999-2000 shows an increase of5.0 percent in priority sector credit compared with3.9 percent in the corresponding period of theprevious year. Credit to large and mediumindustries increased at a lower rate by 1.5 percentduring this period than that by 2.0 per cent in thecorresponding period of 1998-99. Credit towholesale trade increased by 8.9 percent duringthis period as against a decline of 0.5 percent inthe corresponding previous period. However,export credit declined by 5 percent duringApril-October 1999-2000 as against a smallerdecline of 3.1 percent in the correspondingprevious period of 1998-99.Export Credit3.27 Banks are required to lend 12 percent oftheir net bank credit to the export sector.The outstanding export credit of SCBs atRs. 36,827 crore as on March 26, 1999represented an increase of Rs. 2397 crore or7.0 percent over the outstanding credit ofRs. 34,430 crore as on March 27, 1998. As onDecember 3, 1999, the outstanding export creditamounted to Rs. 38,136 crore, indicating anincrease of Rs. 3263 crore or 9.4 percent overthe same period of the previous financial year.During the current financial year, the export creditrefinance limit of SCBs increased vis--vis lastyear and stood at Rs. 8,651 crore as onDecember 3, 1999. The average utilisation ofexport credit refinance ranged from 46.9 percentto 82.5 percent of the refinance limit duringApril-November, 1999. With effect fromApril 1, 1999, export credit refinance is providedto SCBs at the Bank Rate (8%).Priority Sector Credit3.28 Priority sector advances of SCBs (as perprovisional data) increased by Rs.5678 crore or5.0 percent during April-October 1999 comparedwith Rs. 3924 crore or 3.9 percent during thecorresponding period of the previous financialyear. About 70 percent of the incrementaladvances to the priority sector during April-October 1999 flowed to the category Otherpriority sectors in contrast to 40 percent in thecorresponding period of 1998-99.Separate data on priority sector advances forbanks in public and private sectors are notavailable for April-October, 1999. Analysis of datafor 1998-99 showed that priority sector advancesby public sector banks registered improvementto 43.5 percent of Net Bank Credit (NBC) as onthe last reporting Friday of March 1999 from41.8 percent of NBC as on the last reportingFriday of March 1998. Advances to the agriculturesector from public sector banks in 1998-99constituted 16.3 percent of NBC while thecorresponding proportion in respect of the SSIsector was 17.3 percent. The priority sectoradvances of private sector banks increased from40.9 percent of NBC as on the last reportingFriday of March 1998 to 41.4 percent of NBC asat end-March 1999. In their case, advances toagriculture constituted 9.5 percent of NBC , whileadvances to SSI sector accounted for18.9 percent as on the same date. Foreignbanks, for whom the priority sector lending targetis 32 percent of NBC, also registered significantimprovement in their priority sector advancesfrom 34.3 percent as at end-March 1998 to37.0 percent as at end-March,1999. Advancesto export sector accounted for 25.0 percent ofNBC as at end-March 1999 while advances tothe SSI sector formed 11.0 percent as on thesame date.Rural Credit3.29. Though rural financial institutions haveplayed a leading role in the provision of rural credit,the rural sector, especially the agricultural sector,is still in need of more credit. The National Bankfor Agriculture and Rural Development(NABARD), which is the apex organisation in thefield of rural credit, has taken several initiativesin this regard. Notable developments in recentyears are the introduction of Kisan Credit Card(KCC) and the linkage of Self Help GroupsTABLE 3.8Sectoral Deployment of Gross Bank CreditVariations during1April-October April-OctoberItems 1997-98 1998-99 1998-99 1999-2000 1997-98 1998-99 1998-99 1999-2000(Rs.crore) (Per cent)I. Gross bank credit 41292 41729 12638 18589 15.9 13.9 4.2 5.41. Public food procurement 4888 4331 4243 4588 64.3 34.7 34.0 27.32. Gross non-food credit 36404 37398 8395 14001 14.5 13.0 2.9 4.3(a) Priority sector (i+ii+iii) 14627 15104 3924 5678 17.2 15.2 3.9 5.0(i) Agriculture 3427 4765 1750 1536 10.9 13.7 5.0 3.9(ii) Small scale industry 7564 4975 592 174 21.0 11.4 1.4 0.4(iii) Other priority sectors 3636 5364 1582 3698 21.5 25.4 7.5 15.0(b) Medium and large industries 14926 12986 2293 1981 10.3 11.0 2.0 1.5(c) Wholesale trade (excluding 877 748 -61 1247 3.0 5.7 -0.5 8.9food procurement)(d) Other sectors 5974 8560 2239 5095 18.0 14.9 3.9 7.7II. Export credit2 3939 1944 -1056 -1800 1.4 5.7 -3.1 -5.01 As on the last reporting Friday of the period.2 Also included in non-food credit; figures in paragraph 3.27 are more up-to-date.Note :Data are provisional and relate to 50 scheduled commercial banks which account for 90-95 per cent of thebank credit of all scheduled commercial banks. Gross bank credit data include bills rediscounted with RBI,IDBI, Exim Bank and other approved financial institutions.(SHGs) with banks. As against the target of 20lakh KCCs indicated in the Union Budget for1999-2000, the issue of KCCs by the publicsector banks in the country numbered 9.1 lakhduring April-December 1999. The amountsanctioned through these cards was Rs. 2377crore, which worked out to Rs. 26161 per card.In order to enable NABARD to leverage its capitalfunds for raising more resources, its capital basehas been progressively increased from Rs. 500crore in 1996-97 (at the rate of Rs. 100 crore byGOI and Rs. 400 crore by RBI every year) to Rs.2000 crore as on March 31, 1999. Besides sharecapital contribution, Reserve Bank has beenproviding to NABARD a General Line of Credit(GLC) under Section 17(4E) of the RBI Act toenable it to meet the short-term creditrequirements of co-operatives and RegionalRural Banks (RRBs). A line of credit of Rs.5700crore (Rs.4850 crore under GLC-I andRs.850 crore under GLC-II) has been sanctionedto NABARD for the year 1999-2000 (July-June).An additional limit of Rs. 400 crore underGLCI has also been sanctioned in December1999.3.30. An important development in the area ofrural infrastructure has been the creation of theRural Infrastructure Development Fund (RIDF)in 1995-96 in NABRAD with a corpus of Rs. 2000crore to provide funds to State Governments andState owned corporations to enable them tocomplete various types of rural infrastructureprojects. So far there have been five RIDFs(RIDF-I to RIDF-V) with total corpus of Rs.13,500crore. The funds for RIDF are mobilised fromdomestic commercial banks on the basis ofshortfall in their priority sector advancesvis--vis the stipulate targets. The cumulativesanctions and disbursements out of RIDFamounted to Rs. 12109.33 crore and Rs. 4639.48crore respectively as at the end of November1999. Analysis of the trends in utilisation of RIDFat the state level has revealed considerableshortfall vis--vis sanctions. There have,however, been inter-state variations in thisregard. In some States, the utilisation has beenpoor mainly due to inadequacy of own funds tosupplement the provisions under RIDF. In othercases, there have been a wide range of factorswhich contributed to the relatively poorutilisation of funds. In order to enable theStates to enhance utilisation, the Union Budgetfor 1999-2000 has widened the scope ofRIDF to include lending to Gram Panchayats,Self Help Groups and other eligibleinstitutions for implementing rural infrastructureprojects.

Financial PerformanceProfits and Provisions3.19 Profitability analysis of scheduledcommercial banks (SCBs) revealed a decline inprofits during 1998-99 (Tables 3.5 and 3.6).Substantial increase in provisions andcontingencies by nearly 40 percent over theprevious year led to significant decline in the netprofits of public sector banks. Despite fairlysignificant decline in provisions andcontingencies, the net profits of private sectorbanks also declined in 1998-99. In the case offoreign banks, the decline in provisions andcontingencies contributed to higher net profits in1998-99. For SCBs as a whole, provisions andcontingencies increased by about15 percent, and this contributed to a decline of28.3 percent in their net profits. The operatingprofits of SCBs declined by 4.4 percent fromRs. 14,640 crore in 1997-98 to Rs. 13,992 crorein 1998-99. As can be seen from Table 3.6,operating profits of all bank groups except thepublic sector banks declined in 1998-99. Evenin the case of public sector banks, operatingprofits of the State Bank of India (SBI) and itsTABLE ABLE 3.5W orking Results of Sc Scheduled heduled Commer Commercial cial Banks f for or 1997-98 and 1998-99SBI Group 19 Nationalised 27 Public Foreign 25 Old Pvt. 9 New Pvt. AllBanks Sector Banks Banks Sector Banks Sector Banks SCBs1997-98 1998-99 1997-98 1998-99 1997-98 1998-99 1997-98 1998-99 1997-98 1998-99 1997-98 1998-99 1997-98 1998-99A. Rupees CroreA. Income 24871 29349 42835 49518 67706 78867 8697 9719 6438 7361 3015 4131 85857 100078i) Interest 21209 25126 37867 44348 59076 69474 6783 7857 5496 6498 2395 3541 73751 87370ii) Other income 3662 4223 4968 5170 8630 9393 1914 1862 942 863 680 590 12106 12708B. Expenditure 22412 27884 40265 47725 62677 75609 8068 9026 5996 7050 2616 3733 79354 95418i) Interest Expended 13904 16983 26269 30857 40174 47840 4222 5201 4084 5088 1820 2777 50299 60905ii) Intermediationcost 6235 7719 11025 12731 17259 20450 1931 2579 1272 1482 456 669 20917 25180iii) Provisions andcontingencies 2273 3182 2971 4137 5244 7319 1915 1246 640 480 340 287 8138 9333C. Operating Profit 4732 4648 5541 5929 10274 10578 2545 1940 1082 791 740 684 14640 13992D. Net Profit 2460 1466 2570 1792 5030 3258 630 693 443 311 400 397 6502 4660E. Total Assets 232843 285904 416661 484417 649504 770321 65098 76623 54966 65423 25845 38531 795412 950898B. Per Cent of Total AssetsA. Income 10.68 10.27 10.28 10.22 10.42 10.24 13.36 12.68 11.71 11.25 11.90 10.72 10.79 10.52i) Interest income 9.11 8.79 9.09 9.15 9.10 9.02 10.42 10.25 10.00 9.93 9.27 9.19 9.27 9.19ii) other income 1.57 1.48 1.19 1.07 1.33 1.22 2.94 2.43 1.71 1.32 2.63 1.53 1.52 1.34B. Expenditure 9.63 9.75 9.66 9.85 9.65 9.82 12.39 11.78 10.91 10.78 10.12 9.69 9.98 10.03i) Interest Expended 5.97 5.94 6.30 6.37 6.19 6.21 6.49 6.79 7.43 7.78 7.04 7.21 6.32 6.40ii) Intermediationcost 2.68 2.70 2.65 2.63 2.66 2.65 2.97 3.37 2.31 2.27 1.76 1.74 2.63 2.65iii) Provisions andcontingencies 0.98 1.11 0.71 0.85 0.81 0.95 2.94 1.63 1.16 0.73 1.32 0.74 1.02 0.98C. Operating Profit 2.03 1.63 1.33 1.22 1.58 1.37 3.91 2.53 1.97 1.21 2.86 1.78 1.84 1.47D. Net Profit 1.06 0.51 0.62 0.37 0.77 0.42 0.97 0.90 0.81 0.48 1.55 1.03 0.82 0.49Note : Number of foreign banks for 1997-98 and 1998-99 are 42 and 44 respectively.Number of scheduled commercial banks for 1997-98 and 1998-99 are 103 and 105 respectively.TABLE 3.6Variations in Profits of SCBs(Rs. crore)Operat- Provisions NetBanking-Group ing and ProfitProfit Contingencies1. Public Sector (i+ii) 303.8 (3.0) 2075.4(39.6) -1771.6(-35.2)(i) SBI & Associates -84.3 (-1.8) 909.8(40.0) -994.1 (-40.4)(ii) Nationalised Banks 388.1(7.0) 1165.5 (39.2) -777.5 (-30.3)2. Private (Old) -1.4(-26.9) -159.7(-25.0) -131.7(-29.8)3. Private (New) -55.3(-7.5) -52.8(-15.5) -2.5(-0.6)4. Foreign -604.9(-23.8) -668.3(-34.9) 63.4(10.1)Total -647.8(-4.4) 1194.5(14.7) -1842.3(-28.3)Note : Figures in brackets show percentage change over the previousyear.Associates registered a marginal decline of about2 percent. The operating profits of nationalisedbanks, however, increased by 7 percent in1998-99.3.20 There have been changes in the net profitstructure of various bank groups on account ofincrease in competition as well as diversificationof activities. The share of State Bank of India andits seven Associated Banks (SBI Group)increased from 19.3 percent of total net profitsof SCBs in 1991-92 to 31.5 percent in 1998-99,while the share of nationalised banks declinedfrom 43.9 percent to 38.5 percent during thisperiod. The share of foreign banks in the totalnet profit of SCBs also declined from30.4 percent to 14.9 percent , whereas thecombined share of old and new private sectorbanks increased from 6.4 percent to 15.2 percentduring the same period.Net Interest Income (Spread)3.21 The net interest income or spread ofnationalised banks registered a marginalincrease from 2.78 percent of their total assetsin 1997-98 to 2.79 percent in 1998-99. However,the corresponding proportion in respect of theSBI Group declined by 29 basis points from3.14 percent to 2.85 percent during the sameperiod. As a consequence, the net interestincome of public sector banks, which accountfor more than 80 percent of total business ofSCBs, declined by 10 basis points from2.91 percent of total assets in 1997-98 to2.81 percent in 1998-99. During this period, thenet interest income of old private sector banksdeclined by 41 basis points from 2.57 percent oftheir total assets to 2.16 percent, while in thecase of new private sector banks it declined by25 basis points from 2.23 percent of total assetsto 1.98 percent in the same period. As regardsforeign banks, net interest income declined by46 basis points from 3.93 percent of their totalassets in 1997-98 to 3.47 percent in 1998-99.Nevertheless, it is significant to note that of thedifferent bank groups, foreign banks groupregistered the maximum spread in 1998-99 at3.47 percent, followed by the SBI Group at 2.85percent, nationalised banks at 2.79 percent , oldprivate sector banks at 2.16 percent and the newprivate sector banks at 1.98 percent as against2.78 percent for all SCBs.Non-Performing Advances3.22 A non-performing asset (NPA) in Indiarepresents an advance that has not beenserviced, as a result of past dues accumulatingfor 180 days and over. A distinction is also madein India between Gross NPAs and Net NPAs. Inview of the time lag in recovery process and thedetailed procedures and safeguards involved inregard to write-off, even after making provisionsfor advances considered as irrecoverable bankscontinue to hold such advances in their books.These are termed gross NPAs while provisionadjustedNPAs are termed as net NPAs. NetNPAs of SCBs declined marginally from3.0 percent of their total assets as on March31,1998 to 2.9 percent as on March 31,1999. Thecorresponding proportion in respect of publicsector banks declined from 3.3 percent to3.1 percent while it increased from 2.3 percentto 2.8 percent in respect of private sector banksduring the same period. In the case of foreignbanks net NPAs declined from 1 percent of theirtotal assets as on March 31, 1998 to 0.8 percentas on March 31,1999. As the build-up of NPAshas been a major factor in the erosion ofprofitability of public sector banks in India, theNarasimham Committee (II) underscored theneed to reduce the average level of net NPAs forall banks to 3 percent by 2002. The definitions ofweak banks given by this Committee haveinternalized the concept of NPA. The WorkingGroup on Restructuring Weak Public SectorBanks supplemented the above definitions by acombination of seven parameters coveringsolvency, earnings capacity and profitability(Box 3.4). The high level of NPAs of banks inIndia reflects the weak loan recovery mechanism.Data as on March 31, 1999 indicate that out ofthe total number of 21,781 cases involving a sumof Rs. 17,921 crore transferred to/filed with theDebt Recovery Tribunals (DRTs), the number ofcases decided was 3,774 or 17.3 percent of thetotal, and they accounted for 10.0 percent ofthe total locked-up amount in the casestransferred to/filed with DRTs. The net NPAs ofSCBs as a whole increased marginally from7.3 percent of their net advances in 1997-98 to7.5 percent in 1998-99. The net NPAs of publicsector banks declined marginally from8.2 percent to 8.1 percent whereas net NPAs ofprivate sector banks increased significantly from5.3 percent in to 6.9 percent during the sameperiod. The net NPAs of foreign banks declinedfrom 2.2 percent in 1997-98 to 2.0 percent in1998-99. The gross NPAs of SCBs (sub-standard+ doubtful + loss) increased from 14.4 percentof their gross advances in 1997-98 to 14.6percent in 1998-99 (Table 3.7) . As regardsdifferent bank groups, gross NPAs of publicsector banks declined marginally from16.0 percent to 15.9 percent while gross NPAsof private sector banks increased significantlyfrom 8.7 percent to 10.4 percent during the sameperiod. The gross NPAs of foreign banks alsorose from 6.4 percent to 7.0 percent in this period.Capital Adequacy3.23 Capital to Risk-Weighted Assets Ratio(CRAR) reflects the financial viability ofcommercial banks. As on March 31,1999, CRARof public sector banks as a whole was11.2 percent, which was marginally lower thanthe level of 11.5 percent attained as on March31,1998.However, all public sector banks exceptone have achieved CRAR of 9 percent as onMarch 31,1999. As per the prudential norms,SCBs are required to achieve CRAR of9 percent by March 31,2000. A number of bankshave entered the capital market to satisfy thecapital adequacy norm. Till end-March, 1999,8 public sector banks raised capital through equityissues from the new issues market. In fact,Government is encouraging public sector banksto raise capital through public issues. To facilitatethis, they have been allowed to write offaccumulated losses against paid up capital soas to enable them to have higher earnings pershare. The growing presence of commercialbanks in the capital market is reflected in theincrease in the number of banks listed onrecognised stock exchanges from 6 SCBs in1994-95 to 28 SCBs in 1998-99. As atend-March, 1999, the shares of 8 public sectorbanks and 17 private sector banks were listed forsecondary market trading on the National StockExchange (NSE).Bank Supervision and Regulation3.24 The term of the Board for FinancialSupervision (BFS) in the RBI, which is thesupervisory authority for banks, AIFIs, andNBFCs, has been extended upto March 27, 2000or till the reconstitution of the Central Board ofRBI, whichever is earlier. The main supervisoryissues addressed by BFS relate to on-site andoff-site supervision of banks, AIFIs and NBFCs,and registration and prudential norms of NBFCs.The on-site supervision system for banks is onan annual cycle and is based on the CAMELSmodel. It focuses on core assessments inaccordance with the statutory mandate, i.e.,solvency, liquidity, operational soundness andmanagement prudence. Banks are rated on thebasis of this assessment. In view of the recenttrends towards financial integration, globalisationand technological upgradation, it has becomenecessary for supervisors to supplement on-sitesupervision with off-site surveillance. The aim isto capture early warning signals from off-sitemonitoring which would avert financial crisis ofthe nature of the East Asian or Latin Americancrisis. The off-site monitoring system consistsof 12 returns on capital adequacy, asset quality,large credit and concentration, connectedlending, earnings and risk exposures (namely,currency, liquidity and interest rate risks). Theseefforts are further supplemented by an in-depthanalysis of the secondary market movementsof listed scrips, which serve as an indicator ofpublic confidence in financial performance ofbanks. In order to enable banks to manage theTABLE 3.7Classification of Loan Assets of SCBs(percentage distribution of total loan assets)Asset Public Private Foreign SCBsStandard1997-98 84.0 91.3 93.6 85.61998-99 84.1 89.6 93.0 85.4Sub-standard1997-98 5.1 4.8 3.9 4.91998-99 4.9 6.0 3.6 4.9Doubtful1997-98 9.1 2.9 0.8 7.71998-99 9.0 3.6 1.5 7.8Loss1997-98 1.9 1.0 1.7 1.81998-99 2.0 0.9 1.9 1.9Total1997-98 100.0 100.0 100.0 100.0(Rs. crore) (284971) (36753) (30972) (352696)1998-99 100.0 100.0 100.0 100.0(Rs. crore) (325328) (44492) (31433) (401253)Note : Due to rounding, total may not add up to 100.BOX 3.4Major Recommendations of the Working Group on Restructuring of Weak Public Sector BanksKeeping in view the urgent need to revive the weak banks, the Reserve Bank of India set up a Working Groupin February, 1999 under the Chairmanship of Shri M.S. Verma to suggest measures for the revival of weak publicsector banks in India. The major recommendations/points of the Working Group, which submitted its Report inOctober, 1999, are listed below :l Seven parameters covering three areas have been identified; these are (i) Solvency (capital adequacy ratioand coverage ratio), (ii) Earning Capacity (return on assets and net interest margin) and (iii) Profitability (ratioof operating profit to average working funds, ratio of cost to income and ratio of staff cost to net interest income+ all other income).l The definitions/tests provided by the Committee on Banking Sector Reforms (CBSR) should be supplementedby performance analysis based on the seven parameters cited above for identifying weakness in banks infuture.l The seven parameters can also be used to evolve benchmarks for competitive level of performance by publicsector banks; to begin with these benchmarks maybe set at the median levels of ratios pertaining to the24 public sector banks (excluding the three identified weak banks, viz. Indian Bank, UCO Bank and UnitedBank of India).l Narrow banking cannot by itself be adopted as a long-term restructuring strategy.l Closure involves many negative externalities affecting depositors, borrowers and employees, and should notbe exercised unless all other options are exhausted.l Comprehensive restructuring can succeed but calls for firm and decisive actions in exercise of hard options.The Government, management and employee unions must agree upon every important condition of theproposed restructuring programme before it is begun.l Restructuring of weak banks should be a two-stage operation; stage one involves operational, organisationaland financial restructuring aimed at restoring competitive efficiency; stage two covers options of privatisationand/or merger.l Operational restructuring essentially involves building up capabilities to launch new products, attract newcustomers, improve credit culture, secure higher fee-based earnings, sell foreign branches (Indian Bank andUCO Bank) to prospective buyers including other public sector banks, and pull out from the subsidiaries (IndianBank), establish a common networking and processing facility in the field of technology, etc.l The action programme for handling of NPAs should cover honouring of Government guarantees, better useof compromises for reduction of NPAs based on recommendations of the Settlement Advisory Committees,transfer of NPAs to ARF managed by an independent AMC,etc.l To begin with, ARF may restrict itself to the NPAs of the three identified weak banks; the fund needed for ARFis to be provided by the Government; ARF should focus on relatively larger NPAs (Rs. 50 lakh and above).l A 30 35 percent reduction in staff cost required in the three identified weak banks to enable them to reachthe median level of ratio of staff cost to operating income.l In order to control staff cost, the three identified weak banks should adopt a VRS covering at least 25 percentof the staff strength; for the three banks taken together, the estimated cost of VRS ranges from Rs. 1100 to Rs.1200 crore.l The organisational restructuring includes delayering of the decision making process relating to credit,rationalisation of branch network, etc.l Financial restructuring involves efforts to maintain a CAR well above the minimum required level, furtherrecapitalisation subject to strict conditionalities relating to operational and organisational restructuring of therecipient bank, etc.l System restructuring may include setting up of an independent agency under a special Act of Parliament toapprove bank-specific restructuring programmes, initiate their implementation and monitor their progress. Suchan agency may be designated as the Financial Restructuring Authority (FRA).l The existing legal provisions, which are out of line with the present day realities, need to be amended andnew enactments relating to bankruptcy, foreclosures, etc. made.l For speeding up the recovery process, a mechanism should be worked out to make DRTs more effective.risks associated with asset-liability mismatches,detailed Guidelines on Asset-LiabilityManagement and Risk Management Systemshave been issued by RBI. The RBI has alsorecently renewed the existing supervisoryframework in India in relation to the BASLE coreprinciples which are the minimum requirementsfor effective banking supervision laid down by theBASLE Committee on Banking Supervision.Steps are being taken to bridge the gapswhich are mainly in the area of RiskManagement, Consolidated Supervision, InteragencyCooperation and Cross BorderSupervision.

PUBLIC FINANCE2The Budget for 1999-2000 was framed inthe context of continuing global economicturbulence, fiscal slippage in 1998-99, weakperformance of industrial and export sectors,and imposition of economic sanctions after thePokhran nuclear tests. The constellation ofadverse factors strained central governmentfinances during 1998-99. Gross fiscal deficit(GFD) as a proportion of GDP for 1998-99which was placed at 4.5 per cent as per therevised estimates now stands at 5 per cent onthe basis of provisional1 un-audited figures.2.2 The fiscal slippage in 1998-99 set in motiona medium term strategy for restoring the fiscalhealth. The Budget for 1999-2000 envisages afiscal deficit target at 4.1 per cent of the GDP.A new accounting framework has been effectedin respect of small savings and itssharing between the Centre and the States(Box 2.1).2.3 The Budget for 1999-2000 charts out apath of fiscal correction over a medium termwith a view to eliminate the revenue deficit andreduce the fiscal deficit to below 2 per cent ofGDP in four years. The Budget has outlined asix fold strategy encompassing (i) medium termprocess of revenue and fiscal deficit reduction,along the lines indicated in the Ninth Plan(ii) reform of indirect taxes (iii) deepening andwidening of economic reforms in all majorsectors (iv) safeguarding the economy fromexternal shocks (v) strengthening theknowledge based industries and (vi) revitalisingand redirecting public programmes for humandevelopment. Besides, the Budget speech hasacknowledged the very high growth innon-development expenditure as a major hurdlein expenditure management and has takensome initiatives to curb the growth ofnon-developmental expenditure in particular.2.4 The 1999-2000 Budget undertook a majoroverhaul of indirect taxes by reducing themultiplicity of rates, rationalising the ratestructure and drastically curtailing the scopefor discretion by abolishing the power to grantad-hoc duty exemptions. It reduced number ofduty rates for excise from 11 to 3. The cap onMODVAT credit of 95 per cent of the admissibleamount was lifted and restored to 100 per cent.The Budget has also to a large extent fulfilledthe governments intention to ensureconvergence towards a central rate of 16 percent, a merit rate of 8 per cent and a demeritrate of 24 per cent. Further, Budget alsoindicated government's intention to movetowards a single rate and a full-fledged VAT inthe medium term. On the customs side, amodest reduction in peak protective customstariff from 45 per cent to 40 per cent waseffected. This was accompanied by reductionin the number of ad-valorem basic custom dutyrates from seven to five. To reduce dispersionand provide some minimal protection to thedomestic industry, a basic duty of 5 per centwas imposed on a number of commoditieswhich earlier enjoyed duty exemption. Tomitigate the impact of the incidence of 5 percent duty, these were exempted from the 4 percent special additional duty. A uniform1Since February, 1999, Government has been making available provisional actual (un-audited) monthly data on the internet on UnionGovernment Accounts. Where possible, these more recent estimates of fiscal aggregates have been used in place of revisedestimates for 1998-99 in this chapter.BOX 2.1New System of Accounting for Small Savings in the Budgetl The Budget for 1999-2000 made a change in the system of accounting of loans to States & Union Territories(UTs) with legislature against net small savings collections w.e.f. 1.4.99. The change over was effected in theinterest of transparency and viability of the small savings schemes and in deference to a suggestion made in theInter-State Council in December 1998 on delinking the small savings from Central Governments fiscal deficitconcerns. A committee set up under the chairmanship of Shri R.V. Gupta, former Deputy Governor, Reserve Bankof India, examined the modalities of transfer of small savings to an outside organisation. After examining theissue, the committee recommended for establishment of National Small Savings Fund (NSSF) in the PublicAccount of India to account for all the transactions relating to small savings.l The amount (75 per cent States share now has been enhanced to 80 per cent from 15-1-2000) released toState and UT Governments out of net Small Savings & PPF collections w.e.f. 1.4. 1999 would be treated asinvestment in the Special Securities of the respective State Governments and booked under Investments ofNSSF . Further, interest at the rate of 12.5 per cent would be payable from 15-1-2000 and these securitieswould be redeemed from the sixth year over a period of 20 years. The remaining part (25 per cent) of net smallsavings and PPF collections (Centres Share) would be treated as investment in the Special Securities of theCentral Government. Similarly, the outstanding balances at the close of the last financial year (1998-99) undervarious small savings schemes and PPF would also be treated as investment of NSSF in the SpecialSecurities of Central Government.l In essence, under the new accounting system small savings collections would be credited to NSSF. Similarlyall withdrawals of small savings by the depositors would be made out of the accumulation to the Fund. Thebalance in the NSSF will be invested in Central and State Government securities. The income of the NSSFwill consist of the interest earned from the government securities while the servicing cost and the cost ofmanagement of small savings will be the expenditure of the Fund. All investments in Central Governmentsecurities out of the Fund would form a part of Central Government internal debt from 1999-2000.Theinvestment of the net collections in 1999-2000 in Central and State Governments securities is budgeted atRs.8000 crore and Rs.25000 crore respectively. Due to this change in the accounting practice, non planexpenditure of the Centre is budgeted to be lower by Rs.25000 crore which consequently leads to reductionin the Gross Fiscal Deficit (GFD) by a similar amount. The table below gives GFD as percentage of GDP(new series base 1993-94) under old and new accounting framework.Fiscal Deficit As Per Old and New Definition(As per cent of GDP)Fiscal Deficit 1990-91 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000#Old (inclusive of State's share of small savings) 8.3 5.7 5.1 4.9 5.9 6.4** 5.4New (exclusive of State's share of small savings) 7.0 4.8 4.3 4.1 4.9 5.0** 4.1Centre & State Combined* 10.0 6.9 6.4 6.2 7.1 8.5 7.6* For the years 1994-95 to 1999-2000, RBI Annual Report 1998-99; for the year 1990-91 the ratio to GDP has beenworked out using old series (Base 1980-81) of National Account Satistices.**On the basis of provisional un-audited figures. # B.E.Note: 1. Ratios to GDP at current market prices for the year 1990-91 use old series (Base 1980-81) and from 1994-95 onwardsuse new series (Base 1993-94) of National Accounts Statistics released by the Central Statistical Organisation (CSO).2. The ratios to GDP at current market prices for 1999-2000 are based on CSO's Advance Estimates.l Although the different accounting treatment of small savings reduces the Central Government GFD, it has noeffect on the combined GFD deficit of the Centre and States. Earlier any computation of the consolidated deficitof the Centre and the States had to net out this inter governmental flow, so that the consolidated deficit wasless than the sum of its parts.l It may also be noted that the small savings transactions under the new dispensation will reflect the treasurybanking nature of these operations. These flows to a large extent are determined by public preferences, andrelative attractiveness of these instruments.surcharge at the rate of 10 per cent of basicduty was imposed on all commodities excludingcrude oil and petroleum products, itemsattracting 40 per cent rate of basic duty, certainGATT bound items and gold and silver. TheBudget also signaled governments intentionto phase down customs duty structure to Asianlevels in five years.2.5 On the direct tax front, the Budget retainedthe basic tax rates for personal and corporatetaxes, widened the tax base, offered newincentives for housing construction sector,infrastructure and capital markets andstrengthened enforcement through tapping ofhigh value transactions. The period for availingbenefits under section 80 IA was made uniformat 15 years across the infrastructure and coresectors. The Budget also accorded ten yeartax holiday for industries in North-Eastern regionto promote industrialisation. To promote housingconstruction activities, it unfolded a package ofcomprehensive fiscal incentives. With a viewto encourage small investors and invigoratecapital markets, all income from UTI and otherMutual Funds received in the hands of theinvestors were fully exempted from income tax.However, income distributed by Mutual Fundswhere the equity investment is less than 50 percent was subjected to 10 per cent dividend tax.2.6 The Budget provides a multi-prongedprogramme to revitalise and strengthen the ruraleconomy in particular. Recognising the criticalrole of rural infrastructure, the Budget hasenhanced the corpus for Rural InfrastructureDevelopment Fund V to Rs.3500 with extendedrepayment period of seven years and widercoverage. Other major initiative outlined in theBudget for the benefit of the rural economyinclude, inter alia, setting up of a NationalWatershed Development Fund, encouragingbetter management of irrigation assets throughlarger provision of financial assistance to Statesthat rationalise their water rates and rationalisingthe existing rural employment schemes with a view to enhancing their effectiveness. Budgetalso unveiled a National Human DevelopmentInitiative with emphasis on access of vulnerablegroups to food, health care, education,employment and shelter.

INFRASTRUCTURE9Provision of quality infrastructure servicesat reasonable cost, is a necessary conditionfor achieving sustained economic growth. Infact, one of the major challenges being facedby the Indian economy, as we enter the newmillennium is to enhance infrastructureinvestment and to improve the delivery systemand quality of services. Government recognizesthe critical importance of the infrastructuresector and accords high priority to developmentof various infrastructure services such aspower, telecommunications, seaports, airports,railways, roads etc. Investments in thesesectors involve high risk, low return, lumpinessof huge investment, high incremental capital/output ratio, long payback periods, and superiortechnology. These prerequisites pose aconstraint on the Governments efficient deliveryof quality infrastructure services. Governmentis moving away from its traditional role as aprovider of services to one of facilitator andregulator by ensuring that infrastructureservices are actually delivered in a desirablemanner. While liberalizing the rules andprocedures, it has created an environmentconducive for private participation includingforeign investment in infrastructure sector. Thegovernment however, continues to safeguardthe interests of the consumers and needs ofthe poor by providing appropriate regulatoryframework. A series of tax incentives andconcessions have been announced, regulationsand procedures have been simplified forenhancing competition in this sector. Box 9.1summarizes some of the recent initiatives.TABLE 9.1Trends in the Performance of Infrastructure SectorsApril - Dec.* Change over previous yearUnit 1997- 1998- 1998 1999 1985- 1994- 1995- 1996- 1997- 1998- 1998- 1999-98 99* 90 95 96 97 98 99 99@ 2000@(Avg.)(per cent)I. Energy1 Coal Production Mn.tonnes 295.9 292.3 206.7 205.6 6.4 3.2 6.4 5.7 3.6 -1.2 0.2 -0.52 Electricity generated(Utilities only) Bn. kwh 420.6 448.4 330.8 355.3 9.4 8.1 8.4 3.8 6.6 6.5 7.0 7.4(a) Hydro-electric ,, 74.5 82.7 64.6 63.2 3.5 17.5 -12.2 -5.5 8.6 8.8 14.9 -2.2(b) Thermal (incl.nuclear) ,, 346.1 365.7 266.2 292.1 12.3 5.6 14.8 6.1 6.2 5.7 5.2 9.73 Petroleum(a) Crude oil Mn.tonnes 33.9 32.7 24.4 24.3 3.3 19.3 9.1 -6.5 2.9 -3.4 -4.1 -0.4(b) Refinerythroughput ,, 65.2 68.5 46.6 56.8 8.0 4.1 3.9 7.2 3.7 5.2 3.1 21.9II. Cement Mn.tonnes 83.1 88.0 62.5 72.5 8.7 9.9 6.6 8.6 12.8 5.9 4.2 15.9III. Transport andcommunications1 Railway revenueearninggoods traffic ,, 429.4 420.9 306.3 330.7 5.6 1.7 7.0 4.7 5.0 -2.0 -2.5 8.02 Cargo handledat major ports ,, 251.7 251.7 184.3 201.3 6.9 10.0 9.1 5.6 10.6 0.0 0.0 9.23 Telecommunications:New telephoneconnectionsprovided (DELs) '000Nos. 3259.0 3792.0 1649.7 2199.9 16.6 44.0 23.3 17.5 27.1 16.4 26.1 33.4*Provisional. @ April-December.BOX 9.1New Initiatives for Infrastructure DevelopmentGeneral Measuresl Uniform tax holiday of 15 years for all infrastructure sector projects.l Creation of Foreign Investment Implementation authority to smoothen flow of FDI into the infrastructure sector.l The import duty structure for project imports rationalized.Powerl Mega Power Project policy announced.l Restructuring of SEBs to be encouraged; new transmission and distribution systems to get fiscal benefits givento infrastructure sector.Telecoml New telecom policy announced Domestic long distance calls to be opened up. Department of Telecom Services (DTS) to be corporatised by 2001. DTS/MTNL to enter as third cellular operators.l TRAI reconstituted through an ordinance Clear distinction between the recommendatory and regulatory functions of the Authority. Mandatory for government to seek recommendations of TRAI in respect of matters dealing with need andtiming for introduction of new service providers and the terms and conditions of license to a service provider. Composition of Authority i.e. TRAI has been changed. Separate disputes redressal body known as Telecom Disputes Settlement and Appellate Tribunal hasbeen set up.l Specific Targets for Telecom Make available phone on demand by 2002. Encourage development of telecom in rural areas and increase rural tele-density from the current level of0.4 to 4.0 by the 2010. Achieve telecom coverage of all villages in the country by 2002. Provide internet access to all district headquarters by 2002. Resources for meeting the Universal Service Obligation (USO) would be raised through a universal accesslevy which would be a percentage of revenue earned by all operators under various licenses. Existing licence holders of basic and value added services allowed to switch over to a revenue sharingagreement. Provide high-speed data and multi-media capability using technologies including ISDN to all towns with apopulation greater than 2 lakh by 2002.Roadsl A new cess of Re.1 per litre on HSD imposed to generate funds which will be transferred to Central RoadFund. Most of it will be used for development and maintenance of State Roads and National Highway etc.l Model Concession Agreement for BOT road project more than Rs. 100 crore and less than Rs. 100 crorefinalized.Railwaysl Indian Railway Catering &Tourism Corporation (IRTC) Ltd. incorporated as a Government Company with theobjective of upgrading and managing rail catering and hospitalityl Indian Railways have issued Letters of Intent for ownership, operation and management of two luxury trainsin private sector.Civil Aviationl Restructuring of airports of Airport Authority of India (AAI) through long-term leasing route.Urban Infrastructurel Special Package for Housing construction and Services which will facilitate development of urban infrastructure.Foreign Exchange Reserves6.60 The foreign exchange reserves of thecountry consist of (i) foreign currency assetsheld by the RBI, (ii) gold holdings of the RBIand (iii) Special Drawing Rights (SDRs). Thetrend in reserves is largely governed by theforeign currency assets component, whichtends to move in either direction on a day-todaybasis. The foreign currency assetsincreased by US $3.55 billion in 1998-99 andfurther by about US $2.42 billion in 1999-2000(till end-January 2000) to US $31.94 billion. Thequantity of gold held by the RBI fell from 396.2tonnes at the end of March 1998 to 357.3 tonnesat the end of March 1999 on account ofredemption obligations under the Gold BondScheme. Reflecting this reduction in quantityas well as valuation losses on account ofdecline in international gold prices in the firsthalf of 1999, the value of gold held by the RBIdeclined from US $3391 million at the end ofMarch 1998 to US $2960 million at the end ofMarch 1999. At the end of January, 2000 thequantity of gold holdings amounted to 357.8tonnes, valued at US $2945 million. In sum,total foreign exchange reserves (including goldand SDRs) at the end of January 2000amounted to US$ 34.90 billion, which providescover for about 8 months of estimated importsin 1999-2000 and reflects a record high forreserves stock.

Foreign InvestmentForeign Direct Investment6.35 Foreign Direct Investment (FDI) inflowsinto developing countries continue to remainsluggish. In India, FDI inflows declined from US$3557 million in 1997-98 to US$ 2462 million in1998-99. The declining trend continued in 1999-2000. Inflows during the first eight months of1999-2000 were lower at US$ 1330 millioncompared to US$ 1610 million during thecorresponding period in the previous year (Table6.7).6.36 As in the previous two years, in 1998-99, Mauritius continued to be the largest sourceof FDI inflows followed by the USA, though therehas been substantial decline in inflows fromthese two sources. Inflows from Mauritius wereUS$ 900 million in 1997-98, which declined toUS$ 590 million in 1998-99. Inflows from USAalso declined from US$ 687 million in 1997-98to US$ 453 million in 1998-99. Japan and Italywere, respectively, the third and fourth largestsources of FDI in 1998-99. Both these countriesincreased their investments in 1997-98 and in1998-99. Inflows from Germany were less in1998-99 compared to the previous year thoughit was the fifth largest source of FDI in thatyear. There was substantial decline in inflowsfrom South Korea and Netherlands in 1998-99compared to 1997-98. Germany, South Koreaand Netherlands accounted for a decline of US$391.3 million in 1998-99 compared to 1997-98.6.37 While the engineering sector continuedto remain at the top of the list among the FDIrecipients during the last three years, themagnitude of inflows declined over this period.The second in importance was Chemicals andAllied Products with inflows into this sectorincreasing by 46 per cent in 1998-99 comparedto the previous year. Investment in the servicessector increased from US$ 321.3 million in1997-98 to US$ 368.5 million in 1998-99, therebymaintaining its position. Electronics andElectrical Equipment, which received maximuminflow in 1997-98 was, however, relegated tofourth position in 1998-99 due to a significantreduction in inflows.6.38 Table 6.8 shows the trends in approvalsof FDI proposals vis--vis inflows. There hasbeen a steep fall in approvals in 1998 comparedto 1997 (a reduction of 55.7 percent in dollarterms). However, actual inflow as a proportionof approvals improved from 21.1 percent in1997 to 32 per cent in 1998. The decline ininflows therefore has followed from asubstantial reduction in approvals.6.39 FDI inflows into developing countries areestimated to have declined slightly from US$172 billion in 1997 to US$ 166 billion in 1998TABLE 6.7Foreign Investment Flows by Different Categories(U.S. $ million)April-Nov.*1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1998-99 1999-00A. Direct Investment 315 586 1314 2144 2821 3557 2462 1610 1330a. RBI automatic route 42 89 171 169 135 202 179 109 120b. SIA/FIPB route 222 280 701 1249 1922 2754 1821 1252 867c. NRI (40% & 100%) 51 217 442 715 639 241 62 48 48d. Acquisition of Shares$ 11 125 360 400 201 295B. Portfolio Investment 244 3567 3824 2748 3312 1828 -61 -722 1341a. FIIs # 1 1665 1503 2009 1926 979 -390 -791 831b. Euro equities@ 240 1520 2082 683 1366 645 270 15 401c. Offshore funds & others 3 382 239 56 20 204 59 54 109Total (A+B) 559 4153 5138 4892 6133 5385 2401 888 2671Source : RBI.* Provisional.$ Relates to acquisition of shares of Indian companies by non-residents under Section 29 of FERA.# Represent fresh inflow/outflow of funds by FIIs.@ Figures represent GDR amounts raised abroad by the Indian Corporates.TABLE 6.8Foreign Direct Investment : Actual Flows vs. Approvals1991 1992 1993 1994 1995 1996 1997 1998 Total(91 to 98)ApprovalsRs crore 739 5256 11189 13590 37489 39453 57149 28783 193648US$ million 325 1781 3559 4332 11245 11142 15752 6975 55111Actual InflowsRs crore 351 675 1786 3009 6720 8431 12085 9116 42173US$ million 155 233 574 958 2100 2383 3330 2230 11963Actual Inflows as %of Approvals 47.7 13.1 16.1 22.1 18.7 21.4 21.1 32 21.7(In US $ terms)Source : RBINote : The approval and actual inflows figures include NRI direct investments approved by RBI, but exclude flowsunder acquisition of shares of Indian companies by non-residents.(Table 6.9). It is worrying to note that Indiasshare in developing countries inflows declinedfrom 1.9 per cent in 1997 to 1.4 per cent in1998.Portfolio investment6.40 Fresh inflows from FIIs started decliningin 1997-98 and turned into net outflowsamounting to US$ 390 million in 1998-99 (Table6.7). However, recent trends in 1999-2000indicate a sharp reversal reflecting improvingexternal investor sentiment as a result of, interalia, improved global prospects. Fresh inflowsamounted to US$ 831 million during April toNovember 1999 as against an outflow ofUS$ 791 million during the same period in theprevious year.6.41 Amounts raised by Indian corporatesthrough GDRs and ADRs declined from US$645 million in 1997-98 to US$ 270 million in1998-99. Depressed capital market, industrialslackness at home and adverse emergingmarket sentiments affected GDR prospectsunfavourably last year. However, there has beena turnaround in the first half of the currentfinancial year with large issues raised in theTABLE 6.9FDI by Host Region (US $ million)Country 1992 1993 1994 1995 1996 1997 1998eChina 11156 27515 33787 35849 40800 44236 45460India 233 550 973 2114 2426 3351 2258Indonesia 1777 2004 2109 4346 6194 4673 -356Korea, Rep. of 727 588 809 1776 2325 2844 5143Malaysia 5183 5006 4342 4178 5078 5106 3727Philippines 228 1238 1591 1478 1517 1222 1713Thailand 2114 1805 1364 2068 2336 3733 6969All developing countriesincluding China 51108 78813 101196 106223 135343 172533 165936Share of India in developingcountries (%) 0.4 0.7 1.0 2.0 1.8 1.9 1.4Source: World Investment Report, United Nations, 1999.e : estimates.Note : Figures for India in this table may not be comparable with those in other tables because of differences in coverage andsource of information.ADR/GDR market. The successful ADR issuesinclude M/s Infosys Technologies ($ 75 million),M/s Satyam Infoway Ltd. ($ 86 million) andM/s ICICI ($ 315 million). To facilitate conversionof its GDRs into American Depository Shares(ADS), ICICI listed the ADS on the New YorkStock Exchange with effect from 17 November,1999 after complying with stringent listingrequirements of the Securities and ExchangeCommission(SEC) of the USA, includingadherence to GAAP standards.Policies on foreign investment6.42 Several initiatives have been taken toenhance the flow of FDI into the country. InAugust, a Foreign Investment ImplementationAuthority (FIIA) was established within theMinistry of Industry in order to ensure thatapprovals for foreign investments (including NRIinvestments) are quickly translated into actualinvestment inflows and that proposals fructifyinto projects. In particular, in cases where FIPBclearance is needed, approval time has beenreduced to 30 days.6.43 With a view to expand the FIIs category,the Government has permitted foreigncorporates and high net worth individuals toinvest through SEBI registered FIIs. Suchinvestments will be subject to a sub-limit of 5per cent within the aggregate limit for FII portfolioinvestments of 24 per cent in a single company.The Government has also permitted SEBIregistered domestic fund managers to manageforeign funds for investment in the Indian capitalmarket through the portfolio investment routeprovided the funds are channeled throughinternationally recognised financial institutionsand subject to the reporting requirements asapplicable to FIIs.6.44 In March 1999, the RBI issued anotification granting general permission toMutual Funds for issuing units to NRIs /PIOs/OCBs subject to certain specified norms,thereby dispensing with the existing procedureof obtaining prior permission. In addition,approval procedures have been simplified bythe RBI in respect of NRIs/PIOs/OCBs bygranting them general permission in lieu of acase by case approval procedure in a largenumber of areas. This includes acceptance ofdeposits by Indian companies, investment inAir Taxi operations, sale of shares in stockexchanges, transfer of shares/bonds/debentures and immovable property tocharitable trusts/organisations in India as gift,raising of loans by resident individuals/proprietorship concerns on non-repatriablebasis, issue of Commercial Papers by Indiancompanies to NRIs etc.6.45 Foreign owned Indian holdingcompanies were hitherto required to obtainprior approval of the FIPB for downstreaminvestment. They have now been permittedto make such investments within permissibleequity limits through the automatic routeprovided such holding companies bring in therequisite funds from abroad. Also, the needto obtain prior approval of the FIPB forincreasing foreign equity within alreadyapproved limits has been dispensed with inall cases where the original project cost wasup to Rs.600 crore.6.46 Considering the enhanced opportunitiesof Indian software companies for expandingglobally, operational norms governing theiroverseas investments and mode of financingacquisition of overseas software companieshave been liberalised. In December, 1999 anotification was issued by the Ministry ofFinance permitting Indian software companies,which are listed in foreign exchanges and havealready floated ADR/GDR issues, to acquireforeign software companies and issue ADRs/GDRs without reference to the Government ofIndia or the RBI up to the value limit of US$ 100million. For acquisitions beyond US$ 100 million,proposals would require examination by aSpecial Composite Committee in the RBI.6.47 With a view to further liberalise theoperational guidelines for ADR/GDR issues, ithas been decided to dispense with the trackrecord scrutiny process for ADR/GDR issuesand the two stage approval by the Ministry ofFinance. Indian companies would henceforthbe free to access the ADR/GDR marketsthrough an automatic route without the priorapproval of the Ministry of Finance subject tothe specified norms and post-issue reportingrequirement. As ADR/GDR are reckoned aspart of FDI, such issues would need to conformto the existing FDI policy and permissible onlyin areas where FDI is permissible. Such ADR/GDR issues would, however, be governed bythe mandatory approval requirements under theFDI policy.6.48 An Insurance Regulatory andDevelopment Act(IRDA) was passed byParliament in December, 1999. The Act , whichseeks to promote private sector participation inthe insurance sector permits foreign equity stakein domestic private insurance companies uptoa maximum of 26 per cent of the total paid upcapital.6.49 In February 20000, Government took amajor decision to place all items under theautomatic route for FDI/NRI/OCB investmentexcept for a small negative list, which includesthe follwing : (i) items requiring an industriallicence under the Industries (Development andRegulation) Act, 1951; (ii) foreign investmentbeing more than 24% in the equity capital ofunits manufacturing items reserved for smallscale industries; (iii) all items requiring industriallicence in terms of the locational policy notifiedunder the New Industry Policy of 1991;(iv) proposals having previous venture/tie-up inIndia with foreign collaborator; (v) proposalsrelating to acquisition of shares in existing Indiancompany by foreign/NRI/OCB investor;(vi) proposals falling outside notified sectoralpolicy/caps or under sectors in which FDI isnot permitted and/or applications chosen to besubmitted through FIPB rather than automaticroute by the investors. This is an important stepto dispense with case-by-case approvalprocedure and to impart greater transparencyin the process of foreign investment.6.50 Furthermore, subject to sectoral policiesand sectoral caps the automatic route wouldbe available to all foreign and NRI investorswith the facility to bring in 100% FDI/NRI/OCBinvestment. All proposals for investment in publicsector units, as also for EOU/EPZ/EHTP/STPunits would qualify for automatic approvalsubject to the aforesaid parameters.External Commercial Borrowing6.51 Disbursements under ECB (includingUS$ 4230 million from RIBs), were US$ 7226million in 1998-99, almost at the same level asin 1997-98 (US$ 7371 million). Subdueddemand for funds from borrowers due toslackness in domestic industry and higherpremia for emerging market borrowers in theinternational market contributed to lowerdisbursements excluding RIBs. However, sincerepayments fell from US$ 3372 million in1997-98 to US$ 2864 million in 1998-99, netoverall borrowings showed an improvementfrom US$ 3999 million in 1997-98 to US$ 4362million in 1998-99.6.52 The sluggish trend in disbursements hascontinued in the current year. In the first quarterof the current financial year, disbursementswere US$ 621 million against US$ 754 millionduring the corresponding period in the previousyear. Repayments at US$ 631 million were onlymarginally higher by US$ 9 million. Therefore,there has been net repayment in the first quarterof 1999-2000 as compared to net borrowing ofUS$ 132 million in the corresponding period ofthe previous year.6.53 ECB guidelines in 1999-2000 were furtherliberalised and procedures streamlined tofacilitate better access to international financialmarkets, keep maturities long, costs low andencourage infrastructure and export sectorfinancing. The major changes in the guidelinesin 1999-2000 are summarised in Box 6.2.6.54 ECB approvals in 1998-99 were muchlower at US$ 5200 million compared to US$8712 million in 1997-98. In 1999-2000 (up toend-December), approvals amounted to US$2136 million (Table 6.10). The Power sectoraccounted for the highest approvals ofTABLE 6.10Status of ECB Approvals(US $ million)Sector 1997-98 1998-99 1999-00*Power 3014 3998 1699Telecom 1492 75 0Shipping 210 37 27Civil Aviation 373 0 0Petroleum & Natural Gas 230 40 218Railways 179 15 0Financial Institutions 795 150 50Ports, Roads, etc. 61 0 80Others (including exporters) 2358 885 62Total 8712 5200 2136* as on 31.12.99Source : ECB Division, Ministry of Finance, Government of India.US$ 1699 million followed by US$ 218 millionfor Petroleum and Natural Gas. The third largestrecipient of approvals was Ports and Roadswith US$ 80 million. There has been no approvalin Telecom, Civil Aviation and Railways so farin the current financial year.6.55 It is expected that as the domesticindustrial recovery gathers pace and emergingmarket spreads narrow, ECB will be accessedmore in the coming months. Further fillip in thisregard could come from the October, 1999Moodys revision of Indias long term ratingsoutlook from stable to positive. Ratings by otheragencies remain unchanged.Non-Resident Deposits6.56 All redemption payments under FCNRAwere completed in 1998-99. In all otheraccounts, net inflows were lower in 1998-99compared to 1997-98 (Table 6.11). The decliningoverall trend in rupee deposits could reflectinvestors concerns regarding a possible declinein the external value of rupee in the context ofan overall emerging market outlook. There wasalso a decline of US$ 144 million in 1998-99 inforeign currency denominated deposits ofFCNR(B), which was partly on account of ashift of these flows to RIBs. In this regard, it isnoteworthy that after the closure of the RIBscheme in August 1998, inflows started pickingup in FCNR(B). The trend continued with apositive net inflow of US$ 503 million in thisaccount during April-October 1999 reflectingcontinuing investors preference towards foreigncurrency denominated assets.6.57 In the Monetary and Credit PolicyMeasures announced by the RBI for the secondhalf of 1999-2000, the minimum maturity ofFCNR(B) deposits has been raised to one yearfrom six months to minimise the countrys shortterm external borrowing liabilities. At the sametime, the requirement by banks to maintain anincremental CRR of 10 per cent on increase inliabilities over the level as on April 11, 1997 hasbeen withdrawn.TABLE 6.11Outstanding Balances and Net Flows under various Non-Resident Deposit Schemes(US$ million)A. Outstanding Balances under Different Schemes*Schemes As at the end ofMarch 95 March 96 March 97 March 98 March 99 Oct. 99(P.E.)FCNR(A) 7051 4255 2306 1 FCNR(B) 3063 5720 7496 8467 8323 8826NR(E)RA 4556 3916 4983 5637 6220 6530NR(NR)RD 2486 3542 5604 6262 6758 6806FC(B&O)D TOTAL 17156 17433 20389 20367 21301 22162B. Net flows under Non-Resident Deposits*Apr-Oct. (P.E.)Schemes 1994-95 1995-96 1996-97 1997-98 1998-99 1998-99 1999-00Foreign Currency Non-Resident (Accounts) (FCNR(A)) -2249 -2796 -1949 -2305 -1 -1 Foreign Currency Non-Resident(Banks) (FCNR(B)) 1979 2669 1773 971 -144 -267 503Non-Resident External Rupee Accounts (NR(E)RA) 964 -208 1244 1197 980 519 459Non-Resident (Non Repatriable) Rupee Deposits(NR(NR)RD) 682 1279 2246 1256 941 548 209Foreign Currency (Banks & Others) Deposits(FC(B&O)D) -558 TOTAL 818 944 3314 1119 1176 799 1171P.E. : Provisional Estimates. * All figures are inclusive of accrued interest.Source : RBI.BOX 6.2Salient Features of External Commercial Borrowings 1999-2000Average maturities for ECBECBs should have the following minimum average maturities:l Minimum average maturity of three years for external commercial borrowings equal to or less than USD 20 million in respect ofall sectors except 100% EOUs;l Minimum average maturity of five years for external commercial borrowings greater than USD 20 million in respect of all sectors except100% EOUs;l 100% Export Oriented Units (EOUs) are permitted ECB at a minimum average maturity of three years for any amount.l Bonds and FRNs can be raised in tranches of different maturities provided the average maturity of the different tranches within thesame overall approval taken together satisfies the maturity criteria prescribed in the ECB guidelines.USD 5 million SchemeAll Corporates and Institutions are permitted to raise ECB upto USD 5 million at a minimum simple maturity of 3 years.Exporters/Foreign Exchange EarnersCorporates earning foreign exchange are permitted to raise ECB up to thrice the average amount of annual exports during the previous threeyears subject to a maximum of USD 200 million. The minimum average maturity will be three years up to USD 20 million and five years forECBs exceeding USD 20 million. 100% EOUs are permitted to have foreign currency exposure up to 60% of the project cost.Infrastructure projectsHolding Companies/promoters will be permitted to raise ECB upto a maximum of USD 200 million to finance equity investment in a subsidiary/joint venture company implementing infrastructure projects. This flexibility is being given in order to enable domestic investors in infrastructureprojects to meet the minimum domestic equity requirements. In case the debt is to be raised by more than one promoter for a single projectthen the total quantum of loan by all promoters put together should not exceed USD 200 million.Long term Borrowersl ECB of eight years average maturity and above will be outside the ECB ceiling, although the MOF/RBIs prior approval for suchborrowings will continue to be necessary. The Government will review the extent of debt under this window periodically.On-lending by DFIs and other Financial IntermediariesWhile DFIs are required to adhere to the average maturity criteria prescribed, namely, minimum of five years for loans of more than USD20 million equivalent and minimum three years for loans less than or equal to USD 20 million for their borrowing, they are permitted to onlendat different maturities. They may also on-lend for project-related rupee expenditure. However, other financial intermediaries are required toadhere to the general ECB guidelines on maturity as well as end-use in their on-lending programmesProceeds from Bonds, FRNs and Syndicated loanCorporate borrowers who have raised ECB for import of capital goods and services through Bonds/FRN/Syndicated loans are permitted toremit funds into India. The funds can be utilised for activities as per their business judgement except investment in stock market or real estate,for up to one year or till the actual import of capital goods and services takes place, whichever is earlier. In case borrowers decide to deployfunds abroad until the approved end-use requirement arises, they can do so as per the RBIs extant guidelines. RBI would continue to monitorECB proceeds parked abroadECB entitlement for new projectsAll greenfield projects other than infrastructure projects will be permitted to avail ECB to the extent of 35% of the total project cost, as appraisedby a recognised Financial Institution/Bank, subject to the fulfillment of other ECB guidelines.All infrastructure projects will be permitted to have ECB exposure to the extent of 50% of the project cost as appraised by a recognisedfinancial institution/bank, subject to fulfillment of other ECB guidelines. Greater flexibility beyond 50% of the project cost may be allowed incase of power sector and other infrastructure projects based on merits.Pre-payment of ECBPresently, prepayment facility is permitted subject to certain conditions if they are met out of inflow of foreign equity. In addition to thisthe corporates can avail of either of following options for prepayment of ECBs.i. 10% of the outstanding ECBs once during the life of a loanii. All ECBs, with residual maturity up to one year.iii. 100% prepayment is allowed where the source of funds is from Exchange Earners Foreign Currency accounts.Refinancing the existing foreign currency loanRefinancing of outstanding amounts under existing loans by raising fresh loans at lower cost may also be permitted on a case-to-case basis,subject to the condition that the outstanding maturity of the original loan is maintained. Rolling over of ECB will not be permitted.Liability ManagementCorporates can undertake liability management for hedging the interest and/or exchange rate risk on their underlying foreign currency exposure.End use RelaxationECBs can be used for any purpose except investment in real estate and in capital markets.Government equity holding in PSUsIn view of on-going dis-investment programmes, borrowing by PSUs should not incorporate any covenant that Government will continue tohold at least 51% of equity in PSUs concerned.Operating ExpensesOperating and out-of-pocket expenses incurred for ECB approvals, not resulting in loans, are allowed as per prevailing RBI guidelines on currentaccount transactions subject to a cap.Simplification of approval proceduresThe Regional Offices of RBI would take loan agreement/documents on record of all ECB approvals once the Government/RBI has approvedthem.Default interest