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Retail lending to go up

RBI has made an upward revision of real GDP growth to 7.5-8 per cent for 2005-06 up from 7.5 per cent and left the interest rates untouched.

india Updated: Apr 19, 2006 01:25 IST

If it ain’t broken don’t fix it, seems to be the message coming out of Mint Street. Balancing of growth imperatives while dealing with inflationary pressures seems to have taken the Governor’s time.

In an endeavour to create an environment that enables continuation of the growth momentum consistent with price stability, the Reserve Bank of India (RBI) has left the interest rates untouched.

More significantly, the central bank made an upward revision of real GDP growth to 7.5-8 per cent for 2005-06 up from 7.5 per cent.

The markets reacted positively and, on the back of TCS’s 1:1 bonus announcement yesterday, flared up for the second successive day, closing 282 points up.

While announcing the credit policy on Tuesday, RBI Governor Y.V. Reddy decided to keep the bank rate, reverse repo rate, repo rate and cash reserve ratio (CRR) unchanged at six per cent, 5.5 per cent, 6.5 per cent and five per cent, respectively.

However, RBI Governor stressed the need to focus on credit quality and financial market conditions to support export and investment demand in the economy for maintaining macro-economic, and in particular, financial stability.

To check the quality of exposure, the RBI has increase the risk weight on commercial real estate loans to 150 per cent from the current level of 125 per cent. This, in turn, means if a bank is giving a loan against commercial real estate (not residential real estate), it needs to increase its provisioning marginally. This will increase the cost of funds for the banking sector for commercial real estate.

In addition, RBI increased the general provisioning requirements on standard advances i.e. personal loans, loan and advances qualifying as capital market exposure, residential housing loans beyond Rs 20 lakh and commercial real estate loans from present level of 0.4 per cent to one per cent.

This will obviously put pressure on the retail lending rate, which in any case has seen a spike in recent times, revising upwards twice.

It has brought investment in venture capital by banks under the purview of capital market exposure.

A bank’s total exposure to venture capital funds will form a part of its capital market exposure and banks should assign a higher risk weight of 150 per cent to these exposures.
Bankers argue that the RBI has made an attempt for a lower interest rate regime which might propel investment still further. In 2005-06, the credit off-take of scheduled banks was upward of 30 per cent.

The Reserve Bank of India stating that it would respond swiftly to evolving global developments clearly indicates that the central bank would revisit the interest rate scenario after the US Fed increases its interest rate once again, reckon bankers.

Since the US Fed rate is expected to increase by 50 to 75 basis points in the medium term, it will have an impact on global liquidity. And that will force the RBI to, perhaps hike the interest rate in India, argue bankers.

The other risk pointed out by the central bank is the oil spike which has begun its northward journey yet again.

First Published: Apr 19, 2006 01:25 IST