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Rediff.com  » Business » All bank deposits safe, says PM

All bank deposits safe, says PM

Source: PTI
Last updated on: October 20, 2008 17:48 IST
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With the country facing ripple effects of the global meltdown, Prime Minister Manmohan Singh on Monday assured the Lok Sabha that deposits in public sector and private sector banks are 'entirely safe,' but said the nation must be prepared for a 'temporary slowdown' in the economy.

"Our banks, both in the public sector and in the private sector, are financially sound, well capitalised and well regulated. There should be no fear of a failure of any bank," Singh said in a suo moto statement.

"I wish to assure depositors in our banks that their deposits are entirely safe," he said.

The prime minister struck a note of caution against the backdrop of a stock market crash and fears of global crisis hitting the Indian banks.

"The financial storm has shaken confidence in the system and precipitated a steep decline in stock markets. It has produced a sharp slowdown in economic activity, with the prospect of a prolonged recession in industrialized countries," he said.

Exuding confidence over huge capital investment in the pipeline, he said, 'nevertheless, we must be prepared for a temporary slowdown in the Indian economy.'

He said the precise impact was difficult to estimate at this stage since the depth and duration of the global slowdown remained uncertain.

Singh said the financial crisis and the economic slowdown in the developed countries is likely to have an 'indirect impact' on the Indian economy.

The prime minister said the Reserve Bank of India and the government were carefully monitoring the flow of credit and would ensure that the additional liquidity infused into the system translated into actual credit.

"We will not hesitate to do more, if needed. While the capital adequacy ratios of all our banks are well above the Basel norm and above the RBI stipulated norm, the government has promised that it will help banks, which have lower ratios, to access funds to increase the capital risk-weighted asset ratio to 12 per cent," he said.

The government, he contended, was conscious that it was not enough to infuse liquidity which must translate into expanded flow of credit to industry, trade and business.

While inflation has shown a clear deceleration, the prime minister said he expects a 'further reduction' in the wholesale price index in the next two months.

He said some estimates projected GDP growth to go down to 7.5 per cent in the current year. "Our effort will be to minimise the negative effect of the financial crisis. . .  to return to the growth trajectory of 9 per cent," he said.

Citing observers who described the global crisis as the worst since the Great Depression of 1930s, Singh said India, like other developing countries, is experiencing the 'ripple effect.'

He said government has taken a number of steps to minimise the impact. These include infusing liquidity into the banking system and liberalising rules for the FII investments in corporate bonds from $3 billion to $6 billion.

Singh said anticipating a slowdown, government had stepped up public expenditure in the general Budget presented in February this year.

"Our expenditure proposals were criticised at the time in some quarters, but I am happy to note that it is now widely acknowledged that increased public expenditure is an important part of the solution," he said.

The prime minister said expenditure on education, health, NREGP, NRHM, AIBP, JNNURM and other programmes would 'stand us in good stead' in the difficult times.

He asked the Members of Parliament and the people to continue to repose faith in the fundamentals of the Indian economy.

"India has faced challenges in the past and has overcome them. We have the strength to overcome the current challenges too," he said, adding that "there is no place for fear."

Asking members from all sections to support the government measures, he said, "This is the time for unity of purpose and resolute action."

Repo cut to have beneficial impact on interest rates: PM

Prime Minister Manmohan Singh said Reserve Bank's decision to reduce short-term lending (repo) rate by 100 basis points will have beneficial impact on the interest rates.

"It will have beneficial effect on the interest rate structure, and in combination with the other steps to increase liquidity, will help to support economic activity and investment," he said while making a statement on the impact of ongoing global financial crisis on India.

Reserve Bank has lowered the repo rate by 1 per cent in the morning allowing banks to borrow funds from the central bank at 8 per cent as against 9 per cent earlier. The decision was aimed at improving the liquidity position in the country.

"The government welcomes this decision," Singh said while pointing out that it was broadly consistent with "our objective to control inflation which has already begun to moderate."

Recalling the steps taken by the RBI to infuse liquidity into the system, Singh said the central bank has cut the Cash Reserve Ratio (CRR) by a total of 250 basis points and relaxed the Statutory Liquidity Ratio (SLR) requirements by one percentage point.

Subsequently, he added, the RBI opened an additional window of half a percentage point specifically to enable banks to draw funds to provide liquidity to the mutual funds.

"As a result of these steps, the liquidity position in the financial system has improved considerably. The call money rate today is around 6.8 per cent," the prime minister said.

In addition, he said, the government also arranged to provide, in advance, a sum of Rs 25,000 crore (Rs 250 billion) to the banking

system under the debt waiver and debt relief scheme. However, the prime minister added, "it is not enough to infuse liquidity. The liquidity must translate into expanded flow of credit to industry, trade and business. Suitable advisories have been issued by RBI and ministry of finance to the banks to ensure that borrowers are provided adequate credit, including export credit and working capital."

The banks, he stressed, must also provide adequate funds in the form of investment or credit to mutual funds and NBFCs for on-lending to industry, trade and business.

"These institutions are an important part of larger financial system and banks are being encouraged to provide liquidity to ensure that there is no disruption in economic activity."

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