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Time not ripe for tight money policy, cautions banking expert

Our Correspondent in Madras

Chairman of the Banking Sector Reforms Committee M Narasimham called upon the Reserve Bank of India not to embark on a tight monetary policy to counter inflation. Such a step, he said, would be detrimental to economic recovery, signs of which are beginning to surface.

The architect of banking reforms was addressing a seminar organised by the Confederation of Indian Industry in Madras on Tuesday.

"We should not kill these signs in their nascent stage by tightening the monetary screw," he said.

Narasimham said inflation is rising because of monetary expansion and low agricultural production. Elaborating he said the commercial sector was not availing the available credit, leading to higher monetisation. He pointed out that farm output fell by 3.5 per cent and foodgrain production fell from 198 million tonnes to 194 million tonnes.

He also stressed that the Reserve Bank of India should not restrict credit to the commercial sector.

He further suggested that sick banks that are beyond repair should be closed down. "Euthanasia is better," he said. It would be in the interest of depositors and labour, he added. Narasimham advised against further increase in non-performing assets of banks, now at Rs 430 billion. He also advised against recapitalising banks whose net worth has been eroded.

Instead, he suggested, sticky and bad assets should be transferred to asset reconstruction fund. Narasimham mooted the idea of government ownership in public sector banks only to the extent of 33 per cent.

The banking expert said the best way to have total control over the banking sector is to set up a separate regulatory body different from the Reserve Bank of India.