The Reserve Bank of India (RBI), the country’s monetary policy authority, does not seem to agree with the Finance Minister, P Chidambaram. RBI has asked banks to become stricter in loan sanctions, while Chidambaram wants banks to lend aggressively following the injection of Rs 1,85,000 crore of liquidity in recent weeks.
In a hawkish-sounding mid-term review of the 2008-09 monetary policy on Friday, RBI stuck to the credit growth target of 20 per cent and said rapid and unbridled credit growth poses risks to financial stability. Non-food credit grew by 29 per cent on a year-on-year basis as on October 10, 2008, well beyond the target for 2008-09.
“This higher rate of credit growth could possibly be due to the additional demand on domestic credit because of constraints in accessing external (overseas) credit,” said RBI Governor D. Subbarao. “Even so, such a rapid rate of credit growth is a cause for concern and will warrant intensified monitoring and continued correction.”
RBI noted that while maintaining credit quality has always been its central concern, the global financial crisis has reinforced risks of allowing rapid and unbridled credit expansion and the resultant systemic threat to financial stability.
Banks have been advised to continue to lend for productive purposes and, in particular, permit drawing of sanctioned loan limits “guided by their usual commercial judgment”. Banks have also been asked to consider restructuring the dues of small and medium enterprises on merits.
{{/usCountry}}Banks have been advised to continue to lend for productive purposes and, in particular, permit drawing of sanctioned loan limits “guided by their usual commercial judgment”. Banks have also been asked to consider restructuring the dues of small and medium enterprises on merits.
{{/usCountry}}“At the same time, they (banks) should pay attention to maintaining credit quality,” Subbarao said. “In pursuit of this objective, banks should focus on stricter credit appraisals on a sectoral basis, monitor loan to value ratios and calibrate their credit portfolio in tune with their asset-liability projections.”
RBI would be monitoring the rate of credit growth and credit quality closely and would, as necessary, “engage” with select banks, which exceed or are not in tune with the norms.