The Hindu Business Line : <I>Controlling credit </I>

The signals are therefore clear — that the RBI wishes to keep credit growth in check, particularly, to those sectors it sees as "sensitive". The signals are therefore clear — that the RBI wishes to keep credit growth in check, particularly, to those sectors it sees as "sensitive".

Bhaskar Ghosh

The Credit Policy projects the image of a regulator that perhaps intended raising key interest rates but — for compulsions of its own — finally decided not to do so. However, the regulator's desire to tighten and control bank credit comes through strongly in all the other non-interest rate measures.

The RBI's concern is centred, in particular, around four areas of bank credit — capital market exposure, "non-priority" home loans, commercial real-estate loans, and personal loans. The last of these has largely been a surrogate means for individuals in recent months to raise money for investment in the capital market or in real-estate.

Apart from raising the provisioning norms for standard assets in the four areas mentioned above, and in selectively increasing the risk weightage on loans to these "sensitive" sectors, the RBI has also projected non-food bank credit growth at only 20 per cent for the year, against the actual growth rate of around 31per cent recorded last year. It has also raised the interest spread for export credit in foreign currency, in order to reduce arbitrage possibilities between domestic and foreign interest rates.

The signals are therefore clear — that the RBI wishes to keep credit growth in check. The credit needs of other productive sectors are, thus, likely to be met to a greater degree than before.

The RBI's pronouncements suggest that the direction is up rather than down (or even steady) in respect of inflation, in respect of economic growth, and interest rates.

While controlling rampant credit growth, the RBIhas also ensured that the rupee is kept steady by announcing measures that will lead to the inflow of funds from NRI deposits (by raising NRE deposit interest rates) and through controlled FII inflows (by resisting the temptation to increase the risk weightage on banks' capital market exposure, in general, even though standard provisioning norms have been raised).

STRENGTHENING BANKING SYSTEM

The RBIhas also considered ways of strengthening the banking system. Thus, recognising the need for banks to raise additional capital to meet Basel-II requirements , the regulator has announced the means for banks to strengthen their net worth through the issue of preference capital. In all, the RBI has succeeded in meeting its objectives.

(The author is Managing Director, IndusInd Bank Ltd.)