In its latest monetary policy review, the Reserve Bank of India (RBI) has stipulated a minimum margin on the housing loans of commercial banks to prevent “excessive leveraging”. It has also tightened the provisioning norms for home loans. The housing finance companies and bank loans for real estate, however, are not mentioned. The loan-to-value ratio of 20 per cent marks a revival of Selective Credit Controls (SCCs) in a partial sense, the other two provisions of minimum interest rate and credit level being no longer relevant in the context of the changes in banking regulation over the years, since SCC was given up except for advances against sugar to factories. In the RBI’s parlance, SCC refers to the regulation of advances against selected sensitive commodities under Section 21 of the Banking Regulation Act. The universal definition is such that SCC is another term for directed credit. In that sense, there are many regulations like SCC in India such as the prescription for priority sector advances. So SCC has never been dead.
The minimum margin of 20 per cent on home loans is unlikely to achieve the objective. In the post-policy discussion on a TV channel, one participant mentioned that 15 per cent is currently the minimum margin prescribed by his institution. It is possible that after the sub-prime crisis, many banks might have laid down a stiffer margin. So the RBI directive is unlikely to affect the demand for loans. The provisioning norms would, however, have an impact especially on large-sized loans. From the experience this writer gained while manning the policy desk for SCC in the RBI, he would like to say that unless the minimum margins are stiff they do not work.
A Seshan, Mumbai
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