The Hindu Business Line : Banks going slow on retail lending

Banks are slowly choking credit flows to the retail sector in a bid to provide borrowing costs to productive sectors of the economy. High level banking sources said, "The RBI and the Ministry of Finance have directed us to maintain credit flows to the productive sector at all costs and under all circumstances." The sectors include farm, infrastructure and the manufacturing sectors. Accordingly, bankers said funding to these sectors would continue at sub-BPLR (benchmark prime lending rates) levels.

In fact, bankers have been told to bring down their retail, including housing loan exposures, from the current levels. Retail loan portfolios averaged about 25 per cent of net bank credit.

Rate hikes

The first step to choking of credit to the retail segments was by hiking rates. Already retail loans are now being dispensed at rates of over 200-300 basis points over the current BPLR. These spreads over the BPLR would progressively be raised to contain demand, bankers said. Some of these steps have begun yielding results. Some of the public sector banks in fact, have actually managed to bring down the growth of retail loans to less than 21 per cent as against 26 per cent during the corresponding period of the last year.

The cut back would also ensure that farm credit off take would rise to about 20 per cent of net bank credit, bankers said, without any change in the lending rates. Farm sector is already being provided credit at 7 per cent. Inclusive of subsidy support the effective yield from the sector was currently 9 per cent. This rate would remain unchanged, bankers said. Farm credit currently accounts for about 16 per cent of net bank credit.

As for corporate borrowings, most of them were still borrowing at rates below the PLR. Bankers said that the discounts to PLR for some corporates ranged from 150 to 300 basis points. But larger corporates have preferred to access the financial markets directly, though they have kept lines of credit live with the public sector banks. The recent ten-year issue of Rural Electrification Corporation for Rs 1,000 crore was priced at 8.85 per cent or 250 basis points below the SBI PLR.

But it was the smaller corporates that were accessing bank funds. This included SMEs (small and medium enterprises) where the rates are close to the PLR.

Infrastructure lending

It was only infrastructure where credit off-take was still low. In fact credit off-take by infrastructure, that included power, ports, highway development and ports comprised barely 10 per cent of bank credit. Some banks have managed to push this up to about 14 per cent.

Fut for bankers the only way this figure could be raised, would be by cutting back on credit availability to some sectors such as retail and real estate.