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Small units, middle class set to feel credit pinch

The RBI's increase in the cash reserve ratio by 50 basis points, will severely affect common man, reports Arun Kumar.

india Updated: Feb 15, 2007 01:29 IST
Arun Kumar

The Reserve Bank's increase in the cash reserve ratio (CRR) by 50 basis points may not affect the top 100 companies and rich individuals, but it will severely affect common men on the street and the small and medium sized companies, experts and analysts said on Wednesday.

"Anyway, the rich are not bothered about interest rates, it is the middle class which is developing the habit of living life on borrowed money by using credit cards for vacations or driving a car financed by one of the banks or even living in flat which is funded by ICICI or HDFC or any other bank," said Pawan Gupta, an employee with a leading IT service company, who bought a house recently. Like many middle class individuals who have made use of cheap credit, he is feeling the pinch as interest rates rise.

The Reserve Bank of India (RBI) squeezed Rs. 14,000 crore on Tuesday by ordering commercial banks to increase the share of their deposits compulsorily kept with RBI to 6 per cent from 5.5 per cent in a bid to control inflation, which is around 6.6 per cent. While that may ease demand and prices, it can also affect spending that drives growth through investments.

In the last three years, the home loan rate has increased by 4.5 percentage points to 11.75 per cent. As result equated monthly instalments on a 20-year-loan increased by more than Rs 300 per month per lakh of a loan. For a Rs 20 lakh loan, the EMI has increased by Rs 6,000 per month.

The top 100 companies in India, being creditworthy in overseas markets, are mainly not borrowing from the domestic banks and are primarily raising funds either through external commercial borrowings (ECBs) or foreign currency convertible bonds (FCCBs). Even big overseas acquisitions are being funded by foreign banks like ABN Amro, United Bank of Switzerland, Deutsche Bank and Standard Chartered bank.

It is the small and mid-sized companies, which cannot access to the overseas market because of the scale or ability or reach are highly dependent on domestic lenders. It is they who are going feel the brunt.

“No AAA rate company borrows from Indian banks. In fact many of them even do not exercise the credit limit,” said the chairman of a leading bank.

RBI's main intent is to control inflation, which it plans to by slowing down credit growth, currently at 30 per cent. It also wants to discourage speculative lending in the real estate sector. But the government feels lending for manufacturing industries will not slow down.

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First Published: Feb 15, 2007 01:29 IST