Traditionally, the credit policy in India is announced twice a year. The one in April is the lean season credit policy and the one in October the busy season one.

If I were the Reserve Bank of India governor, I will be more involved with ensuring the overall development of the banking sector. This will imply that Reserve Bank officials play a much bigger role in monitoring banks, encouraging them to perform optimal risk-taking and play out their roles as intermediaries.

An obvious corollary of this approach is that the RBI has to reorient itself as a regulator, rather than a manager, of banks.

Another way of putting this is to say that the RBI sticks to monetary policy, a macroeconomic goal, and stop concentrating on credit policy, which requires a more micro approach. It is the job of financial intermediaries, like banks, to channel the money given to them bydepositors to the better projects.

The better projects are not determined only by the sectors they belong to. Thus, not all software projects, or the ones dealing with the drugs and pharmaceutical industry, are worthy of funds. On the other hand, a steel project may be good enough to finance.

It is the bank's job to identify the right combination of good managers and good projects. The best the RBI can do is identify the growing sectors. Since they seldom have the opportunity to meet the actual borrowers, they are in no position to identify the good managers.

The maximum they can do is devise guidelines on broad observable characteristics of who the good managers are. This has two problems. First: it holds back banks from lending to new ventures of unknown entrepreneurs if the projects do not belong to the sectors suggested by the RBI. In an era where the economy needs fresh investment and growth through increased entrepreneurial activity, this acts as a damper. Second, it gives a false sense ofsecurity to the banks. They know that as long as they stick to the guidelines, they cannot be faulted on their loan portfolio.

It, thus, allows them to move away from the position of positive decision-making where they actively search out profitable projects to lend to, to one of vetoing the ones that do not fall strictly within the guidelines. This does not help to unleash the high growth rates we are hoping for.

The current Reserve Bank of India governor has already taken some bold steps in the right direction. During the last credit policy he had announced that our economy cannot wait six months every time a new credit policy has to be announced.

In a transition economy, with new policies coming up every now and then, we need a financial market and a credit regime that is responsive to these changes. Otherwise, the purpose of many of these policies will be defeated, and the carefully thought out sequencing of policy announcements will become redundant.

The governor is aware of this and has assuredeverybody that credit policy changes will be announced whenever necessary. The credibility of this assertion comes not from the fact that he is an honourable man, which he is, but because he has backed up his pronouncements with action. He has made changes outside of April and October!

One only hopes that he goes the extra mile and releases the RBI from having to make credit policy decisions. Unfortunately, our banks are not yet in a position to take the lead in credit markets, should the RBI vacate its position. Of course, one view could be that banks will take the initiative only if they have to, and I am inclined to believe this. However, for this viewpoint to be true, the organisation in banks needs to change drastically.

Banks may have to be privatised first. Since this latter will remain a pipedream for quite some time to come, one will have to depend on the RBI governor to successfully armtwist the nationalised banks to do their real job as intermediaries.

In the meantime what can the governordo? Our interest rates are still too high, and the terms and conditions for loans too stringent. To reduce the cost of borrowing, the governor can ease credit supply by following an easy money policy. By itself, it may not work as, of late, our banks have shown a disturbing tendency to hold on to excess reserves. Banks should be urged by the RBI to lend out their money and this can be done by ensuring that banks do not own more reserves than they need to.

The SLRs, instead of being only a minimum ratio, can also have a maximum allowable limit. However, for this to work, the banks must in some way be assured of being able to recover their dues from borrowers. This will mean a faster debt recovery process, which requires major judicial reforms. While the governor is not in charge of legal reforms, he can use his good offices to convince the powers that be that they need to overhaul the debt recovery laws and procedures.

While he is at it, he can also put in a word about how useless is the concept ofpriority sector lending. If the government, in its doubtful wisdom, wants to encourage particular sectors, it should do so through direct subsidies and leave the banking sector out of it.