Rein in lending frenzy: JP Morgan

JP Morgan Chase Bank has cautioned that India's "lending frenzy" warrants a sterner policy response.

The Reserve Bank of India (RBI) has tightened the monetary policy since mid-2004, but the job is still not done.

The stubbornly high pace of credit expansion warrants a stronger response from the central bank, JP Morgan said in an economic research note.

"Despite the genuine medium- and long-term appeal of India's economic resurgence, unbridled bank lending could jeopardise economic prospects, if the central bank is forced into reacting in a heavy-handed manner after being slow to correct lending excesses at the outset," it said.

Bank lending has been increasing by over 30 per cent for the fourth successive year.

The loan-to-GDP ratio is forecast to jump to nearly 50 per cent for 2006-07 from 31.4 per cent in 2003-04. Loan growth has been running in excess of deposit growth, pushing up the loan-deposit ratio to record highs.

"It is widely believed that political pressure has prevented the RBI from tightening the policy more, with local media reporting differences between Finance Minister P Chidambaram and RBI Governor Y V Reddy on the interest rate outlook. It is to the governor's credit that he appears to have stood up to the political pressure and has tightened monetary policy as much as he has," the note said.

The RBI is now expressing increased concern over the pace of lending to "sensitive" sectors and over credit quality.

The RBI classifies real estate, capital markets, and commodities as "sensitive" sectors that are prone to high volatility and unpredictable price movements.

Commercial banks' lending to "sensitive" sectors jumped 95.2 per cent in 2005-06 to Rs 2,86,690 crore (19 per cent of total lending by the banking sector), while the public sector banks' exposure to "sensitive" sectors surged 95 per cent to Rs 1,71,620 crore (15 per cent of their total lending).

Loans to real estate made the largest contribution to total lending in both cases. Separately, the banking sector's gross non-performing loans declined to 3.3 per cent of total loans in 2005-06 from 10.4 per cent in 2001-02.

However, the sector could suffer renewed deterioration in asset quality if there is a sudden setback in economic growth.

Data as of end-June indicates that personal loans jumped 47 per cent over a year ago.

Housing loans, which are included in personal loans, were up 54.3 per cent and account for 14.5 per cent of total non-food loans. Also, loans to commercial real estate surged 102 per cent, though these still account for only 2 per cent of non-food loans.

The cocktail of strong consumer demand for better housing, the current push toward organized retailing that is boosting demand for real estate to construct malls, and the effort to improve physical infrastructure more generally - coupled with easier and greater access to bank credit - have caused residential and commercial property prices to surge.