RBI ups CRR, getting loans becomes harder

Updated on Oct 31, 2007 12:04 PM IST

The CRR hike closely follows the SEBI's move to regulate the seemingly endless inflows of foreign funds, reports BS Srinivasalu Reddy.

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HT Image
Hindustan Times | ByBS Srinivasalu Reddy, Mumbai

Home and personal loans just got more difficult to get, though they may not get more expensive. On Tuesday, the Reserve Bank of India, in its mid-term review of the credit policy, raised the Cash Reserve Ratio (CRR) to 7.5 per cent, a rise of 0.5 per cent. The CRR is the proportion of total deposits that banks have to keep with the RBI. This is the fourth such hike this year.

The CRR hike closely follows the stock market watchdog's move to regulate the seemingly endless inflows of foreign funds that have been driving stock indices to record highs. Overseas investors have bought $18.7 billion (Rs 74,800 crore) of stocks and bonds this year, double the record set in 2005.

Banks will now have lesser money — to the tune of about Rs 15,000 crore across India — to loan out. They may land uppreferring to give money only to those with good debt repayment records.

So, instead of giving home loan to someone contributing 25 per cent of the cost from his or her own pocket, the bank may make it mandatory for the buyer to contribute 35 per cent.

As far as lending rates are concerned, banks had raised them in March along with those of fixed deposits. However, fixed deposit rates were lowered later and loan rates were supposed to follow suit. Now, with the CRR hike, this will probably not happen. Fixed deposit rates are expected to remain steady too.

"Rates may not go up or down. Some banks had started reducing rates, but that trend may not continue," said Chanda Kochhar, joint MD of ICICI Bank. MS Sundara Rajan, chairman and MD of Bank of India, agreed. "It's a measure to stabilise the economy," he said.

The cash reserve hike is likely to result in higher returns from government securities. "The policy is unlikely to impact the common man directly," said Sandesh Kirkire, CEO of Kotak Mutual Fund.

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