The Hindu Business Line : Govt asks public sector banks to moderate credit growth

HIGH-LEVEL MEETING: (From right) Mr P. Chidambaram, Finance Minister; Mr S.C. Gupta, CMD, Punjab National Bank; Mr V. P. Shetty, CMD, IDBI Bank; and Mr M.B.N. Rao, CMD, Canara Bank, at Vigyan Bhavan Annexe in the Capital on Thursday. - Kamal Narang

New Delhi April 18 The Finance Minister, Mr P. Chidambaram, has once again asked public sector banks (PSBs) to slow down credit flow to risk-prone sectors such as `commercial real estate', capital market and `systemically important NBFCs'.

This advice comes less than three months after he had asked the PSBs to rebalance their lending to provide more credit for productive sectors as against the RBI identified risk-prone sectors.

credit growth

"We have advised banks that credit growth at 30 per cent has to be moderated. Therefore they would have to rebalance their portfolio and moderate credit growth in sectors that have been identified as high risk sectors by the RBI," Mr Chidambaram told presspersons after a meeting with Chief Executives of PSBs here on Thursday.

Concerned about the persistently high credit growth, the RBI had, on January 31, increased provisioning on standard assets in commercial real estate, capital markets and certain non-banking finance companies (NBFCs) from 1 per cent to 2 per cent.

The Finance Minister said that PSB chiefs told him today that the rebalancing had started from the second half of the last financial year and the impact of it would be seen in the first half of the current financial year.

"We have impressed upon them that they would have to rebalance their portfolios so that adequate credit is available to productive sectors," he said.

The aggregate credit exposure of PSBs grew 30 per cent from Rs 11,10,014 crore as on March 2006 to Rs 14,39,582 crore as on March 2007.

While credit to commercial real estate sector saw a 59 per cent increase from Rs 25,429 crore as on March 2006 to Rs 40,427 crore as on March 2007, the PSBs exposure to capital market grew to Rs 9,067 crore as on March 2007 from Rs 5,451 crore on March 2006. PSBs exposure to systemically important NBFCs increased from Rs 20,087 crore as on March 2006 to Rs 26,286 crore as on March 2007.

Bulk deposits

Meanwhile, Mr Chidambaram has cautioned PSBs against raising bulk deposits at high costs.

"It's a vicious circle. If you (PSBs) do it in February and March, you will do this in next February and March also," he said, referring to certain PSBs move to raise bulk deposits at high rates during end of fiscal 2006-07.

Bulk deposits of PSBs surged 38 per cent during 2006-07 from Rs 3,36,354 crore to Rs 4,36,852 crore, reflecting an increase of Rs 1,20,518 crore.

The total bulk deposits mobilised at interest rates of 11 per cent and above during 2006-07 stood at Rs 86,264 crore. The aggregate deposits of PSBs grew 23 per cent during 2006-07.

IBA guidelines

The Finance Minister announced that Indian Banks Association would evolve guidelines to ensure that banks do not compete with each other to source bulk deposits at high cost.

On the issue of enhancing credit flow to minorities under priority sector, Mr Chidambaram said that PSBs have been advised to open more branches at the 103 identified minority concentrated districts of the country.

He also said that the RBI has agreed to amend its Master Circular on minorities.

Mr Vinod Rai, Secretary (Financial Sector), later clarified that a suitable insertion (specifically on minorities) would be made in this circular under the category of `weaker sections'.

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