Banks tighten screws on personal loans

MONETARY POLICY 2006-07

Banks have been asked to step up provisioning for standard personal loans, loans and advances qualifying as capital market exposures and residential housing loans exceeding Rs 20 lakh to 1.0 per cent from 0.40 per cent.

In the annual monetary policy statement released today, the Reserve Bank of India (RBI) has revised the provisioning norms on the above loan categories, on the basis of the Narsimham Committee recommendations on banking sector reforms.

The central bank has allowed for these provisions to be eligible for inclusion in the tier-II capital for capital adequacy purposes up to the permitted extent. The RBI will issue operational guidelines on this separately.

Speaking on the impact of the hike in standard provisioning, G V Nageswara Rao, managing director, commercial banking SBU, IDBI Bank, said such a move would not cause any concern as far as interest rates on these loans were concerned. Rao further explained that the average ticket size of home loans in the banking sector is approximately Rs 10 lakh.

The share of home loans exceeding Rs 20 lakh in banks' total housing portfolio is very small. According to private sector banker, the RBI's previous move of hiking the provisioning norm from 0.25 per cent to 0.4 per cent did not generate much of an impact on both the pricing and demand for loans.

Nicholas Winsor, head - personal financial services, HSBC India, said, "Through this hike, the RBI has attempted to ensure that the growth in banks' loan books is prudent and that banks provide for potential credit losses. Also, it is a move that aims at protecting banks from over-exposure to these sectors."

Previously, the committee on banking sector reforms under the chairmanship of M Narasimham had recommended that a general provision of about one per cent of standard assets of banks would be appropriate and should be implemented in a phased manner as a prudential measure.

In its mid-term review of October 2005, the RBI had increased the provisioning requirement on all standard assets, with the exception of direct advances to agricultural and SME sectors, from 0.25 per cent to 0.40 per cent of the funded outstanding on a portfolio basis.