RBI thrust on credit quality; key interest rates held steady

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Go slow on loans to real estate and capital market, banks told

Our Bureau

Mumbai, April 18

In a clear warning to banks to improve asset quality, rather than the quantum of credit, the Reserve Bank of India has called for a slowdown in lending to sensitive sectors such as real estate and capital markets.

In its Annual Policy Statement for 2006-07, announced on Tuesday, the RBI has kept its key interest rates - reverse repo, repo and cash reserve ratio - unchanged

The RBI has also projected a lower credit growth of 20 per cent for the current year against 30 per cent in the last two years.

The central bank has increased the risk weight on bank exposures to commercial real estate and capital market to 150 per cent from 125 per cent. Banks' exposure to venture capital funds will also form part of its capital market exposure, the RBI said. Thus, banks now have to set apart more capital in their books as cover to maintain their existing level of lending to these sectors. The RBI had increased the risk weightage for these sectors from 100 to 125 per cent in July 2005.

Dr Y. V. Reddy, Governor, RBI said, "We are not taking a view on whether asset price is appropriate or not. But the growth in these sectors is such that it is better for banks to provide higher provisioning."

Loans to commercial real estate rose by 84 per cent last year.

The central bank also increased the banks' provisioning for standard advances from 0.4 per cent to 1 per cent for personal loans, capital market exposures, residential housing of more than Rs 20 lakh and commercial real estate loans. Dr Reddy said, "There have been reports of people buying multiple homes, which could increase the risk. We had to keep a delicate balance. We felt that Rs 20 lakh is reasonable. Improvements in the housing market, such as rationalisation of the Urban Land Ceiling Act and stamp duty rates, could prompt us to reduce the risk weightage."

This move may force banks to re-price their home loan rates for high-end loans, said a bank official.

The policy projects an aggregate deposit growth at around Rs 3,30,000 crore in 2006-07.

In a move to help banks raise more deposits, the RBI has increased the ceiling in interest rates for NRE deposits for one to three years maturity to 100 basis points above Libor or Swap rates.

The central bank's annual policy indicates a possible rise in interest rates, in the event of an upturn in inflation due to pass-through of international oil prices.

"Taking into account the real, monetary and global factors having a bearing on domestic prices, containing inflationary expectations would continue to pose a challenge to monetary management," it said.

The policy has projected a lower growth of non-food credit at 20 per cent in 2006-07, a `calibrated deceleration' from over 30 per cent in the last two years.

Dr Reddy said, "We hope to bring growth to a reasonable trajectory by emphasising on improvement in quality, but not diluting growth. The word calibrated has been introduced deliberately."

The economy's performance in 2005-06 was better than expected and inflation has been curtailed to 5-5.5 per cent, he said, adding that it was "good times" for the external sector, money market and forex markets.

For 2006-07, the GDP growth has been targeted at 7.5-8 per cent, but it is critically dependent on agriculture.

"The three risks to growth are physical infrastructure, fiscal situation and agriculture. We need to ensure that investment should take place in agriculture," said Dr Reddy.

Interest rates headed north, say bankers

Interest rates are headed northward in the long term. This was largely the reaction of bankers across the country.

The RBI left key short-term rates and the bank rate unchanged, but hiked the provisioning requirement on standard personal loans and residential housing loans over Rs 20 lakh and exposures to commercial real estate and the capital market (including venture capital funds) from 0.4 per cent to one per cent.

This meant that loans in these segments could get costlier, said bankers.

Mr Shailendra Bhandari, Managing Director, Centurion Bank of Punjab, said the move came as a surprise. Banks may pass on the extra cost of the higher provisioning to borrowers. "There could be a hike of 20-25 basis points in housing loans", said Mr Bhandari.

Home loans account for 20 per cent of the retail portfolio of Centurion Bank of Punjab.

Mr Bhandari also said that a hike in interest rates in July during the quarterly review of the credit policy seemed likely given the global factors that have been pointed out by the RBI.

Regulatory policies were quite strict and would have a considerable adverse impact on the capital adequacy ratio and the bottom line of banks, said Mr V P Shetty, CMD, IDBI Ltd. "Provisional norms have been modified and additional capital charge has been prescribed for certain riskier asset classes so as to enable channelling the growth in the desired direction", he said.

Mr R Jayakumar, CEO, Fitch Ratings, said increasing the provisioning requirement and the risk weightage would lead to costlier loans to these segments thus dampening the growth in these overheated segments to an extent. The increased provisioning requirement will also have an impact on the profitability of banks, he said.

Housing finance companies said the move to increase the risk weightage and provisioning requirement was a sharp one. Mr Kapil Wadhawan, Managing Director, Dewan Housing Finance Ltd, said there would be pressure on margins and their capital requirements will increase.

(This article was published in the Business Line print edition dated April 19, 2006)
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