The much awaited busy season credit policy announced by the RBI governor has aroused considerable interest. While it is premature to make a value judgement on its positive impact on the financial system and economic management of the country, it must be admitted that the policy has pushed the banking sector to gear itself up for greater market orientation.

It is, however, a moot question whether banks are at all ready to lend money to non-corporate or non-prime small-scale industry borrowers. The greatest irony of the liberalised regime is that while banks are going overboard to finance large corporates, who have other means of seeking cheaper finance like commercial paper, bonds and debentures, the more needy borrowers in small scale industry sector are not only denied timely credit but are invariably tarred with the brush of suspicion by most banks. This mindset has to change. Let not the contribution made by small scale industries to the country's economy be underestimated. During the last five years the output of small scale industry units in the country has grown by almost 64% from Rs 1,90,000 crore to Rs 2,95,000 crore. Employment (in terms of work force employed) grew by nearly 13 per cent from 130 lakh to 147 lakh.

Exports more than doubled from Rs 13,850 crore to Rs 28,000 crore.The main reason for this negative mindset of bankers is the fear of accountability which is all pervasive. This fear psychosis is further compounded by a ridiculously slow process of determining and fixing accountability in most banks even in respect of those cases where no malafides or acts of gross negligence are involved. Risk aversion, therefore, mainly stems from this serious shortcoming in the system. Besides, in the present context of depressed market conditions, political instability and severe demand recession bankers are wary of granting fresh advances.

Although the new credit policy is aimed at reducing real interest rates and increasing credit flow to industrial sector, it remains to be seen how far this seemingly positive measures are going to sensitise the harassed bankers to lend money to the needy non-corporate borrowers in the absence of clear cut policy directions from the apex bank for dealing with accountability cases pertaining to commercial lendings based on fair banking risk. This again raises the question of what really constitutes fair banking risk. This is the crux of the whole matter. It is rather unfortunate that the mandarins of the banking system have thus far not cared to define what precisely fair banking risk means in lending operations. It is this nebulosity that has aggravated the problem of risk aversion in banks. This is one area where the Reserve Bank of India needs to introspect and take a closer look at the whole system of determining and fixing staff accountability by banks when a credit decision goes wrong.

Bankers have the legitimate right to know as to what extent they can take risk exposure before taking a credit decision. Managerial decisions in banks are generally taken a lot quicker when they fit into a policy framework or procedural guidelines. What is of critical importance in credit-decision making is a quick analysis of factors for and against. It is at this stage of credit decision making process that bankers are sometimes prone to make genuine mistakes or errors of judgement. Should the bankers be hounded in such situations? These are some of the more critical areas the Reserve Bank should address itself and issue policy guidelines to banks as to what precisely constitutes fair banking risk and also how and in what manner staff accountability should be determined and fixed when a credit decision taken by bankers within the definition of fair banking risk, goes wrong.

It is only with this kind of bold new initiatives and policy directions by the Reserve Bank of India that credit off-take will improved and not just by lowering interest rate or reducing cash reserve ratio (CRR). Banks already had enough lendable resources even before the announcement of the busy season credit policy by the Reserve Bank. The fact of the matter is that there is no genuine demand for credit from the industrial sector because of lack of demand for goods and services.

Be that as it may, it is unlikely that the busy season credit policy will excite the market or fuel credit off-take in any significant manner so long as the demand recession, lack of investor confidence in primary market and political instability continue to bug the country's economy. Let us keep our fingers and toes crossed.

The author is a senior executive with the State Bank of India and the views expressed are his own

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.