Mumbai: With Bimal Jalan ensconced at the helm, Reserve Bank of India (RBI) continued its policy stance in 2002 on soft interest rate regime, low inflation, providing adequate liquidity even as fresh inflows led to the foreign exchanges reserves scaling a record high in excess of $ 68 billion.

Jalan has been successful in advocating the "Indian experience", wherein unlike in the past, India has been able to prevent external crisis by adoption of sound external management policies.

Maintaining that primary responsibility of crisis prevention has to be that of the country itself, RBI governor, who has been given a two-year extension, was of the view that a stable macro-economic environment with low inflation, low current account deficit and reasonable growth was essential to prevent crisis.

RBI also factored in the drought situation in several parts of the country while scaling down the gross domestic product from 6-6.5 per cent to 5-5.5 per cent for fiscal 2002-03. Despite this India was in a comfortable position with inflation being low along with yields on government securities, ample liquidity and highest ever foreign exchange reserves.

During the fiscal, RBI reduced the cash reserve ratio and bank rate by 0.75 per cent and 0.25 per cent respectively.

The Joint Parliamentary Committee (JPC) in its recent report termed RBI's supervision as "weak and inefficient" and said that timely action was not taken in preventing diversion of funds and check irregularities in functioning of certain banks.

Jalan, in his address at the Bank Economists' Conference said, regulation was largely perceived to be free or costless and as such, tends to be over demanded by public and over-supplied by the regulator.

The focus in current debate was whether regulation should be imposed externally through prescriptive and detailed rules or alternatively, by the regulator creating incentive compatible contracts that reward appropriate behaviour, the governor said.

In the ultimate reckoning, it was necessary to recognise that there were distinct limits to what regulation and supervision can achieve. In particular, it does not provide a foolproof assured contract and does not absolve either management or consumers of their responsibilities, he added.

In its campaign against money laundering and uncovering of funding of terrorist activities on a global scale through the banking channel, banks were told by RBI to put in place systems and procedures to help control financial frauds, identify money laundering as well as suspicious activities and for scrutiny or monitoring of large value cash transactions.

With the Securitisation Bill receiving Presidential approval, the apex bank has framed the draft guidelines for securitisation and reconstruction companies. It has also issued draft guidelines on fair practices code for banks and financial institutions (FIs).

RBI formulated a scheme for banks to set up offshore banking units in special economic zones. These units would be virtually foreign branches of the domestic banks in India and would be exempted from cash reserve ratio and statutory liquidity ratio. They would also be able to access finances abroad at international rates.

The dual control on the urban co-operative banks (UCBs) has been the bone of contention for quite some time with a spate of scams hitting the banks including the recent multi crore government securities swindle.

RBI's proposal for setting up of an apex supervisory body for UCBs was being examined by a committee under the chairmanship of minister of state for finance.

The committee, while agreeing that the duality of control should be done away with, has recommended that the apex bank should be vested with full powers for regulation and supervision of UCBs, which RBI was not so keen to handle as this sector was dominated by politicians.

RBI has cautioned the government that delay in initiating measures to remove the duality of control would make it further difficult to make the supervisory system effective.

The government sector scam also prompted RBI in advising commercial banks, co- operative banks, local area banks, regional rural banks, primary dealers, FIs and non-banking financial institutions to take certain measures to reduce the scope for trading in physical form.

PTI