Credit Policy & Its Impact on International Finance

8/6/2019 Credit Policy & Its Impact on International Finance

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Credit policy & its impacton International Finance.


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Definition of Credit Policy.

Guidelines that spell out how to decide which

customers are sold on open account, the exact

payment terms, the limits set on outstandingbalances. The aspects of credit policy are:-

Credit standard.

Credit period.

Cash discount.


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Credit Policy for the Year 2006-07.

By:-

Mr. Y.V.Reddy-The Governor of RBI


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The highlights of the Mid-Term Review of the Annual

Monetary and Credit Policy for the Year 2006-07.

Repo Rate increased to 7.25 per cent from 7.0 per cent.

Reverse repo rate was 6% and bank rate and CRR keptunchanged @5 %

GDP growth forecast at around 8.0 per cent during 2006-07.

Inflation to be contained within 5.0-5.5 per cent during2006-07. but it did reached to 6.12% with an increase in

th

e prices of food grains.


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Scheduled commercial banks and primarydealers to be allowed to cover their shortpositions in Central Government securities within

an extended period of five trading days. Resident individuals would be free to remit up to

US $ 50,000 per financial year as against theearlier limit of US $ 25,000.

Foreign exchange earners may retain up to 100per cent of their foreign exchange earnings intheir Exchange Earners' Foreign Currencyaccounts.


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Authorized dealer banks may borrow funds fromtheir overseas branches and correspondentbanks (including borrowing for export credit,

external commercial borrowings (ECBs) andoverdrafts from their Head Office/ Nostroaccount) up to a limit of 50 per cent of theirunimpaired TierI capital or US $ 10 million,

whichever is higher. Prepayment of ECB up to US $ 300 million

without prior approval of the Reserve Bank.


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The existing limit of US $ 2 billion oninvestments in Government securities by foreigninstitutional investors (FIIs) to be enhanced in

phases to US $ 3.2 billion by Marc

h31, 2007.

The extent ceiling of overseas investment bymutual funds of US $ 2 billion is enhanced to US$ 3 billion.

Importers to be permitted to book forwardcontracts for their customs duty component ofimports.


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Monetary and Credit Policy for the Year 2006-07

Forward contracts booked by exporters and importers inexcess of 50 per cent of the eligible limit to be ondeliverable basis and cannot be cancelled.

Authorized dealer banks to be permitted to issueguarantees/letters of credit for import of services up toUS $ 100,000 for securing a direct contractual liabilityarising out of a contract between a resident and a non-resident.

Lock-in period for sale proceeds of the immovableproperty credited to the NRO account to be eliminated,provided the amount being remitted in any financial yeardoes not exceed US $ one million.


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Monetary and Credit Policy for the Year 2006-07

Prudential limit on credit and non-credit facilities toIndian Joint Ventures/Wholly Owned Subsidiaries abroadto be enhanced to 20 per cent of unimpaired capitalfunds.

The existing limit of US $ 2 billion on investments inGovernment securities by foreign institutional investors(FIIs) to be enhanced in phases to US $ 3.2 billion byMarch 31, 2007.


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The impact on International

Finance


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The Impact.

Inflow increased of forex currency was 2nd highest i.e.US$8209mn

Rupee depreciated from 44.95 to 46.54

Revival in capital inflow helped currency gain inSeptember and October.

Domestic stock market witness a net FII selling ofUS$1261mn in QIFY05 and net investment ofUS$2776mn in QIFY06.

OctoberFII was higher- US$1552mn.

Interest rate should be hiked to restrain the pressure ofinflation.


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The Impact on economy.

Growth of economy to create a demand side pressure.

Shortfall in kharif output during 06-07 will exert pressureon prices of primary articles.

The decrease in the oil prices was a relief. Average inflation to be forecasted at 5-5.5% assuming a

small reduction in the future prices of oil.

Following the buoyancy in the secondary market for gilt-

edged securities, the secondary market turnover forcorporate bonds rose to Rs 54 crore from Rs 32 crore in

October; it nevertheless remained moderate.


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The Impact on economy

GDP grew in the third quarter from 7.5%-8%.

In November Gilt edged securities had huge turnover asa result improving inflation and the concern expressed

about the liquidity scenario

hiking t

he repo rate.

Development in the forex market made RBI to interveneand arrest the sharply appreciating rupee value againstUS$.

Call money rates decreased from 6.81% to 6.62%.


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Credit Policy & Its Impact on International Finance