Banks put squeeze on retail loans

Banks are finally following the advice of monetary authorities having consciously decided to curtail demand-fuelling loans to consumers, real estate, and even corporates at cheaper rates, as steeper monetary tightening by the central bank looms.

Punjab National Bank (PNB), the third largest bank in terms of total assets, has decided to reduce the share of retail loans by 3 percentage points to 22 per cent of total loans. PNB plans to particularly target its personal loan portfolio.

"We will slow down new approvals for most sectors, except SME and priority sectors. Banks have to co-operate with the central bank by slightly squeezing credit flow," said a senior official with a large public sector bank based in south India.

The Reserve Bank of India (RBI) started the current monetary tightening phase in October 2004, but has since only seen banks aggressively growing their credit portfolios at unprecedented rates. Bank credit has grown around 30 per cent for the third consecutive year.

In its intensified battle against inflation, RBI has raised cash reserve ratio (CRR) by 100 basis points since December to suck out excess liquidity and it has also made availing of funds from the central bank expensive by raising the repo rate by 25 basis points each in October 2006 and January 2007. 

In Rs crore	Outstanding balances at
	2004-05	2005-06	September
			2005	2006
I. Gross bank credit	1045954	1433728	1194588	1576982
1. Public food procurement credit	41121	40691	40327	33458
2. Gross non-food Bank Credit	1004833	1393037	1154261	1543524
of which:	249374	384108	292395	461308
(1)Housing	133908	184790	152286	209099
(2)Consumer durables	8976	8167	9211	9574
(3)Real estate loans	13546	26378	18047	35574
(4)Loans to individuals4	4101	5210	4323	4485
Note : Data is provisional; accounts for 90 per cent of bank credit of all SCBs. 4. Against shares and debentures/bonds

A liquidity crunch is also making many banks go slow on disbursements, helped further by delays in off-take of loans already sanctioned for real estate, housing and personal purposes.

Borrowers in these three segments are very cautious as these loans have been hit the most by the frequent interest rate increases over the last couple of months.

A senior official at the State Bank of India (SBI) said, "There is pressure in terms of borrowings. Interest rates have firmed up further. The extent of slowdown in disbursements for each bank will depend on how much money it has."

The surge in liquidity in the banking system over the last week has been on account of unsterilised interventions by the RBI to absorb foreign currency inflows and also on government spending.

The RBI has bought about $7 billion foreign currency this month, infusing rupee liquidity of around Rs 30,000 crore in the banking system.

Bankers fear the RBI may step up monetary tightening, which in its own words has been "moderate so far", if the easy liquidity conditions persist and continue to excessively expand money supply.

"We are not encouraging loans for consumption purposes. We are looking at a 3 per cent reduction in the share of retail loans in our total portfolio, from 25 per cent to 22 per cent. Most of this reduction will come from personal loans where we have raised rates by up to 1 percentage point. Credit will go to productive sectors such as agriculture, SMEs," said U S Bhargava, general manager, PNB.

Apart from the commercial real estate sector which can now get funds from banks only at rates above prime lending rates (PLRs), larger companies too are facing the heat of banks' attempt at slowing growth in their loan books.

"We are being selective on fresh proposals from corporates. If the yield is less, we are not showing interest. Earlier, if we were lending to corporates at 3-3.5 per cent below PLR, now we lend only at 1-1.5 per cent below PLR to the best (triple AAA) corporates," said the executive director of a public sector bank.