Financial Daily from THE HINDU group of publications
Monday, Apr 17, 2006
Financial Daily from THE HINDU group of publications Monday, Apr 17, 2006 |
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Money & Banking - Credit Policy RBI may look into rising asset prices, diversion of bank funds Priya Nair
Considering the high asset prices and the large funds flow to the equity markets, RBI may raise the risk weightage on lending to real estate and capital market from the current level of 125 per cent to discourage excessive lending to these sector.
Mumbai , April 16 Rising asset prices and diversion of bank funds into the capital market are being seen among the critical issues that the Reserve Bank of India may address in the April 18 Credit Policy. The central bank has been expressing concern over the growing credit and the quality of assets. Analysts are of the view that the recent trend in the real estate, capital market and consumer credit calls for a closer scrutiny of funds flow into these segments. Funds disbursed by banks and non-banking finance companies as term loans and consumer finance are believed to be finding its way to the stock markets. Though top officials of banks say that they have adequate mechanism to ensure the end use of credit provided by them, analysts say that leakages cannot be ruled out. In the October 2005 monetary policy, RBI had rationalised the capital market exposure norms for banks by linking such exposure to bank's networth as against a percentage of their advances. This was seen as a relaxation and individual banks were allowed to have higher limits.
Risk weightage
According to analysts, considering the high asset prices and the large funds flow into the equity markets, RBI may raise the risk weightage on lending to real estate and capital market from the current level of 125 per cent to discourage excessive lending to these sector. It would be difficult for banks to strictly monitor the end use of funds. "For banks lending as part of a consortium, it will be difficult to monitor diversion of funds. Normally, corporates deal in equities through their investment subsidiaries," said an official with a public sector bank.
Rate hike
A majority of the market participants also expect RBI to raise the repo and reserve repo rates by 25 basis points. With global interest rates rising, this move will help maintain the differential between interest rates in India and overseas. This in turn will continue to attract foreign funds to India, said a dealer. A rate hike would also help to minimise inflationary pressures, as the potential threat of rising oil prices still exists. High industrial and GDP growth also warrants a rate hike, said analyst. However, another section of bankers feels that the RBI may avoid a rate hike now, as inflation is fairly under control. The central bank has hiked repo and reverse repo rates by 25 basis points in April 2005, October 2005 and in January 2006.
Related Stories: More Stories on : RBI & Other Central Banks | Credit Policy | RBI & Other Central Banks
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