The Hindu Business Line : We want to keep a tab on housing loan sector: Reddy

THE Reserve Bank of India has been cautioning banks to ensure quality assets in their housing portfolio. In the mid-term review of its annual policy, the central bank has hiked the risk weight for housing loans. In an interview to Business Line, Dr Y. V. Reddy, RBI Governor, explained the rationale behind the decision and other policy issues.

You have raised the risk weight for housing loans. Do you see diversion of housing loans to other sectors or is there a housing bubble waiting to burst?

No, there is no question of diversion of funds. I would say when something is going wrong in the financial system, it is necessary for the regulator to watch. In non-food credit, the housing sector has been growing very fast. Anecdotal evidence from the bankers indicated a sense of discomfort with regard to (in some branches) impact of the pricing of loans with more money chasing the same houses. In some other countries, this is how the bubble started. It is not that we think a bubble is starting to form here but the housing loan sector is growing, we want to have the liberty to keep a tab. This is a temporary measure. Most banks have the capital to meet the higher weightage.

So, will it lead to a rise in housing loan rates?

It may or may not. That depends on other factors too. Certainly there will be little more caution (on the part of the banks) in expanding the exposure in this sector. This is what is desired. This is healthy and will help prevent the bubble. We have only hiked the risk weight by 25 per cent. It can be rolled back.

In many countries where the housing finance is developed, the risk weight may be lower, based on the actual experience of the NPA. In our country, we do not have adequate experience with regard to how the NPA is generated. In fact, in the past we have reduced the risk weight to encourage housing. But the expansion in this sector was far beyond our expectation.

You have increased the individual limit for housing loan under priority sector lending from Rs 10 lakh to Rs 15 lakh. Is this a cushion to balance the hike in risk weight?

The two are unrelated. One (risk weight) is a short-term measure. The other is a sustainable one.

You have not touched the bank rate, but only raised the repo rate. How long will you be able to retain the bank rate at 6 per cent when inflation is ruling above this level?

In the past, the movement of bank rate did not coincide with that of the repo rate. In fact, more often than not, there are many changes in repo rate and fewer changes in bank rate. So, you cannot read more than that into this. The bank rate is a signal unlike in the case of an operating instrument like repo. Given the current situation, there is no need to change the bank rate. While we are conscious of the oil shock, we are not sure of what would be the underlying inflation beyond six months. If I cannot take a view on the underlying inflation beyond six months, it is not appropriate for me to change the bank rate. Whereas, we are very clear in terms of inflationary expectations at the shorter end where the interest rates have already moved to some extent. This type of movement will be consistent for monetary management.

You mentioned about harmonised response to oil price hike (by the Government, oil companies and RBI). How long will you be able to have such a response to a global phenomenon?

As the policy itself has indicated, the headroom is less. If the supply shock persists for long, the relative burden sharing will have to change.

For instance, if we assumed that the oil shock is temporary, the entire burden cannot be shifted to the consumers.

If it is seen to be less temporary, then we will have to start shifting the relative sharing of the burden.

Will the repo rate hike lead to higher cost for Government borrowing?

As of now, it is very difficult to say what will happen on the borrowing front. One can say, given the aggregate budgeted borrowing requirement, it should be possible to complete the borrowing programme in a stable environment.

There is scope of unwinding the liquidity available with the market stabilisation scheme. There is a large number of non-bank participants willing to pick up the Government paper. However, the Government borrowing programme has to be conducted in a calibrated manner.

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