The Hindu Business Line : Blowing hot and cold

Why do the authorities swear by priority given to housing but impose restrictions that make loan-giving a difficult exercise? Is it a case of being politically correct but financially shy, asks S. VENKITARAMANAN, adding that banks will need massive injections of equity if they are to have adequate capital to cover the additional credit expansion, which is vital for the economy to sustain its high-growth path. There is no point mourning the lack of GDP growth if credit is not adequately encouraged.

There has been a good deal of commentary and critique on the RBI Governor's latest Monetary and Credit Policy. While Dr Y.V. Reddy's actual changes in rates were marginal, his comments on credit growth, particularly in such sectors as credit cards and housing, invited veiled as well as other comments.

The Finance Minister himself has lent support to Governor Reddy, stating that banks need to rebalance their portfolios. Rebalancing with reference to what — resource availability, risks or priority?

The Governor's concerns are about housing and credit cards, in particular. As far as housing is concerned, the total outstanding loans from scheduled banks as on June 25, 2006 were worth Rs1,72,000 crore for a population of 100 crore, leading to an average outstanding loan of just Rs 1,720.

Definitely, this is a small figure, considering the average cost of housing at today's price level.

One of the gains of the reform period has been the spread of housing credit and the capacity of individuals to borrow and thereby own houses with reasonable monthly repayments.

The importance of housing as an enabling feature of modern urban and rural living can hardly be overemphasised. There is also the spill-over benefit that housing activity encourages employment of relatively unskilled manpower, such as masons and bricklayers, apart from spurring the growth of cement, timber and steel industries.

The fact that house ownership in the US has become widespread and comes at affordable prices attracts the young men and women of the world to its shores. Through federally guaranteed organisations such as Fannie May and Freddie Mac, mortgage financing has become very attractive in the US.

Indeed, the securities of both these organisations have high credit ratings because of implied credit guarantees. No wonder, much of the investment by the cash-rich but otherwise poor economies in Asia is made in these securities.

Asia virtually finances US housing. In these circumstances, it is hard to understand how and why both the RBI and the Centre have been trying to talk down expansion in home-loans.

US experience

Obviously, there is a lesson from the US experience of asset bubble, which is behind the authorities' ambivalence towards housing. On the one hand, we want to copy the outstanding success of America in creating a stock of housing that will be the envy of the world.

On the other, we want to "avoid" the housing boom, which has allegedly threatened the stability of the US economy, as the house-owner continually churns his stock by selling to capture the higher price prevailing. I feel we are still, by and large, far away from such booms and busts.

There was a reference in Dr Reddy's statement to the need for more transparent practices in giving home loans. Housing loans are disbursed in a highly competitive scenario and competition is the best assurance for transparency in lending.

The loan applicant is actively sought after by a number of lenders and he can play off one against the other. There can be no better "market" for transparency than a spate of bidders and counter-bidders for housing loans.

In the circumstances, either the authorities mean what they say when they swear by priority given to housing. Or they want to be politically correct, but financially shy. They want to expand housing loans and at the same time impose significant restrictions, such as higher provisioning norms, to make loan-giving a difficult exercise.

Such ambivalence in a relatively important sector does not behoove either the RBI or the Government!

Credit cards

Governor Reddy has been exercised about the growth in loans against credit cards. He has obviously in mind the growth of 199.9 per cent ,year on year. But the extenuating circumstance is the low base of bans against credit cards. The total outstanding loans against credit cards in June 2006 was only Rs 7,000 crore, a measly figure considering our trillion-dollar economy and the booming young population of upwardly mobile earners and spenders. Caution in the use of credit cards is good advice, but is it part of a central banker's remit or better left to schools and colleges?

Overall, there is the question of whether credit growth in India is adequate to sustain the GDP growth of plus 8 per cent. After all, the expanding services and manufacturing sectors need more credit to sustain both the working capital and capital investment requirements. If at this stage, the central bank talks of over-lending when many in India have not even been able to access credit — witness the tragic cases of farmers' suicides — I feel the central bankers are sending out confusing signals. By all means try to tell banks to take risk mitigation measures but if the objective is to ensure a credit culture that will take care of production and investment needs, why exhort bankers to lend and, at the same time, not to lend?

An exercise needs to be undertaken, if it has not already been done, to estimate the needs of banking resources by both the Government and private entities in the coming five-to 10-year time-frame. Whether the credit growth will be adequate to meet their needs has to be carefully gone into. It is obvious that India's disbursement of gross credit is significantly lower in relation to GDP than it is in the US, the UK or even in countries such as China (see Table).

For the world as a whole, the ratio was 158 per cent. India's ratio is comparable only with Indonesia, at 59 per cent, and Brazil, at 61 per cent.

No wonder India remains under-developed compared to China, Japan, the US and the UK. It is, therefore, no use mourning the lack of GDP growth if credit is not adequately encouraged.

Capital adequacy

This raises important issues of overall resource balance. Whether Indian banks will have adequate deposit resources to meet the credit needs has to be examined. Preliminary calculations by experts show that there is likely to be a constraint.

Even if "inclusive credit" expansion is completed, demand for credit may increase rather than access to deposits. The estimate of likely deposits and loans denied is critical.

There is also a related question of capital adequacy. Especially is this exacerbated by the introduction of Basel-II norms, which allow for higher risk mitigation.

Capital adequacy norms will also mean that banks, particularly in the public sector, will need massive injection of equity if they are to have adequate capital to cover the additional credit expansion.

Credit growth is absolutely important if the economy to manage to retain its high growth path. The Deputy Chairman of the Planning Commission, Dr Montek Ahluwalia, may need to confer with the RBI Governor to anticipate and resolve the resource problems that loom large on the horizon, if the credit needs of the growing economy are to be met.

The success of the Plan objectives depends critically on the success of these difficult but necessary negotiations between the Planners and the bankers, not excluding, of course, the masters of North Block.

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