RBI bullish on funding credit

The Reserve Bank of India (RBI) has said banks have over Rs 1,57,000 crore headroom in the form of excess statutory liquidity ratio (SLR) investments to fund the scorching credit growth.

Bankers, however, said the central bank's intention behind pointing at the excess SLR investments was to ease banks' liquidity concerns, amid unrelenting growth in credit "� particularly loans, despite the recent rise in interest rates.

The RBI, in its first quarter monetary policy review yesterday, stuck to its 20 per cent credit growth forecast for 2006-07, notwithstanding a 32 per cent increase in non-food credit during April 1-July 7, 2006 over a high base a year ago.

The central bank seems to be telling banks that it has not stopped deliberating on slowing down credit growth.

Bankers and analysts said the RBI had refrained from a further tightening of credit market on Tuesday so as to avoid hurting the expected pickup in demand for credit to fund expansion plans.

They expect a further increase in provisionings and risk weights on exposures to certain sensitive sectors, like real estate including home loans and personal loans, in the next review.

The banking system's SLR investments on July 7, 2006 were 31.5 per cent of net demand and time liabilities (or deposits) or NDTL, which amounted to Rs 1,57,548 crore. The level of SLR holdings is down from 36.4 per cent of NDTL on July 8, 2005.

Excluding liquidity adjustment facility holdings, investments of banks in approved securities in excess of the SLR amounted to Rs 99,273 crore or 4.1 per cent of the system's NDTL.

"We would not totally rule out further prudential measures on banks in the coming quarters if loan growth rates, in some hot sectors, do not come down. Though the RBI has not increased standard assets provisioning or risk weights further in the current review, there are covert warnings to banks to strengthen their credit appraisal systems," ICICI Securities said.

IDBI Capital Market said the pricing of housing loans vis-a-vis credit pricing to triple A-rated corporates provides evidence of what could be considered mispricing of credit.

The current yield on 10-year bond of triple A-rated company is 9.25 per cent, while a 15 to 20-year housing loan to individuals is priced at 9 per cent.

It further said, "Banks price their longer-tenure loans to individuals, often with unproven credit history, at interest rates finer than the shorter-tenure loans to blue-chip companies. The issue that emerges is whether the credit spread is adequate to cover the default risk on the bank loans being extended. In our opinion, it is clearly insufficient."