The Reserve Bank of India on Wednesday raised a key short-term lending rate and announced other measures which are set to tilt the money market more towards savings than borrowings. Direct selling agents and bank relationship managers may not swarm you next time when you seek a loan to buy a house or a car or any other personal effect.
In a clear bid to rein in inflation and the runaway growth in the personal loans portfolio of banks, the RBI tightened the liquidity (funds available for lending) in the banking system.
On the face of it, the review appears sober and understated. The central bank raised only the repo rate by 0.25 percentage points to 7.5 per cent, which will result in a higher cost of borrowing for banks. RBI’s tightening of prudential norms and doubling of provisioning requirements on loans to certain sectors such as real estate and capital markets and loans against credit cards will bring down banks’ appetite for such assets. Higher provision for loans to non-banking finance companies will also curtail overall lending to some extent.
This will result in lower fund flow to these sectors. Adjustment in rates offered to non-resident Indians and on foreign currency deposits with banks, will make them less attractive.
“Each bank has to take a call on its need to hike deposit and borrowing rates based on reserves, level of credit portfolio and net worth,” said SC Gupta, CMD of Punjab National Bank.
Though RBI raised the GDP growth projection for 2006-07 from 8 per cent earlier to 8.5-9 per cent, the somewhat negative impact of the current measures will be felt on the economy in three to four quarters, according to some economists, contrary to RBI’s contention