an in in ndia 12.15
(ii) internal autonomy for public sector (i) Directed credit programme should
banks (PSBs) in their decision making be phased out gradually. As per the
process; and committee, agriculture and small scale
(iii) greater degree of professionalism in industries (SSIs) had already grown to
banking operation. a mature stage and they did not require
any special support; two decades of
recommenDAtion of cfs interest subsidy were enough. Therefore,
The CFS recommondation25 could be summed up concessional rates of interest could be
under five sub-titles: dispensed with.
1. On Directed Investment (ii) Directed credit should not be a regular
programme—it should be a case of
The RBI was advised not to use the CRR as a extraordinary support to certain weak
principal instrument of monetary and credit sections—besides, it should be temporary,
control, in place it should rely on open market
not a permanent one.
operations (OMOs) increasingly. Two proposals
advised regarding the CRR: (iii) Concept of PSL should be redefined
to include only the weakest sections of
(i) CRR should be progressively reduced
from the present high level of 15 per cent the rural community such as marginal
to 3 to 5 per cent; and farmers, rural artisans, village and cottage
(ii) RBI should pay interest on the CRR of industries, tiny sector, etc.
banks above the basic minimum at a rate (iv) The “redefined PSL” should have 10 per
of interest equal to the level of banks, one cent fixed of the aggregate bank credit.
year deposit. (v) The composition of the PSL should be
Concerning the SLR it was advised to cut it reviewed after every 3 years.
to the minimum level (i.e., 25 per cent) from the
present high level of 38.5 per cent in the next 5 3. On the Structure of Interest Rates
years (it was cut down to 25 per cent in October The major recommendations on the structure of
1997). The government was also suggested interest rates are:
to progressively move towards market-based
(i) Interest rates to be broadly determined by
borrowing programme so that banks get economic
benefits on their SLR investments. market forces;
These suggestions were directed to the goal (ii) All controls of interest rates on deposits
of making more funds available to the banks, and lending to be withdrawn;
converting idle cash for use, and cutting down the (iii) Concessional rates of interest for PSL of
interest rates banks charge on their loans. small sizes to be phased out and subsidies
on the IRDP loans to be withdrawn;
2. On Directed Credit Programme
(iv) Bank rate to be the anchor rate and all
Under this sub-title the suggestions revolved other interest rates to be closely linked to
around the compulsion of priority sector lending it; and
(PSL) by the banks:
(v) The RBI to be the sole authority to
25. Ibid. simplify the structure of interest rates.