The Hindu Business Line : Unfreezing lending

Unless the RBI and North Block convince bankers that caution can sometimes be a risk, credit will not flow from bank vaults into factories and homes.

From the latest liquidity enhancing measures announced by the Reserve Bank of India late Saturday, it would seem the central bank is in a tearing hurry to unravel its tight money policy of the last three years. The markets had the weekend to mull over the beneficent effects of the string of changes meant to address problems on three fronts: Rupee and foreign exchange liquidity and existing prudential norms that have driven bank credit away from certain sectors considered risky. Just how much will the latest measures lift the pall of gloom hanging over the organised sector?

The RBI assumes that the present credit crisis is similar to the one it addressed from mid-September onwards when it began its liquidity-injection measures that resulted in some Rs 2 lakh crore streaming into the banking system by early November. Thus, it extends the special term repo facility that banks can avail of to meet liquidity needs of mutual funds and NBFCs till March next. To encourage greater inflow of foreign exchange, it enhances interest rate ceilings on Foreign Currency Non-Resident (Banks) (FCNR) accounts and Non-Resident (External) Rupee Accounts by 75 basis points. This is quite unnecessary since remittances will remain robust for some time with interest rates in the West forced down to almost zero. Then, the central bank zeroes in on credit problems of specific sectors — exporters will get pre-shipment export credit for an extended period; shortfalls in bank credit to housing and small industries will be made good by advance allocations to the NHB and SIDBI. And, most importantly, risk weights on banks’ exposures to certain sectors and general provisioning requirement on standard advances for residential housing loans, commercial real estate and loans and advances qualifying as capital market exposure have been reduced.

But is the RBI addressing the right problem? Since late October, the credit crisis has morphed into a psychological problem from the physical one of liquidity. Banks do not want to lend to even the sectors once considered lucrative like airlines, cement and steel, realty and infrastructure. The liquidity injected by the RBI over a month since mid-September has mainly been parked in G-Secs as RBI data for the period show. The problem, therefore, is not the lack of funds but a paucity of credit because both the RBI and North Block have so far failed to address the change in the perception of lenders. Unless they can convince bankers that caution can sometimes be a risk, credit will not flow from bank vaults into factories and homes.

Related Stories:
RBI gives banks long rope on home loans portfolio
More banks cut lending rates
Chidambaram signals more credit for housing, consumer durables
Banks’ provisioning norms for realty, capital markets eased

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