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Government wants banks to go slow on sensitive sectors

Government wants banks to go slow on loans to sensitive sectors

Apnaloan.com Research Bureau

10 Aug 2007

Mumbai: The government is nudging all public sector banks to go slow on loans to sensitive sectors like stock market and real estate and prune outstanding like credit card receivables. In a recent letter to the state-owned banks, the finance ministry has said public sector banks need to have a re-look at the continued high credit growth in the sensitive sectors and take necessary steps for rebalancing overall credit portfolio.

The March 29 letter, issued by Amitabh Verma, joint secretary in the banking division, comes against the backdrop of a continued rise in the share of sensitive credit real estate, commodities and stock market. The banking regulator, RBI, has also shown concern on ballooning personal loans and credit card portfolio of banks. These loans are unsecured in nature and are more prone to defaults.

Bankers said the letter was aimed at reminding banks to direct credit to the productive sector as was indicated by the finance minister in his last few interaction with state-owned banks. Sources said banks have already begun moving towards reducing exposure in sensitive sectors due to the pressure from the finance ministry and higher provisions imposed by RBI.

In its credit and monetary policy announced in January this year, RBI had raised provisions on loans under personal loan head, credit card receivable, real estate, stock market and non-banking finance companies to 2%. The provisions were pegged at 1% earlier. A 2% provision would mean that for every loan of Rs 100, bank will have to set aside Rs 2 as provisions. This move is expected to impact banks profits for year ended March 2007.

The country's biggest consumer finance lender ICICI Bank has already said consumer borrowing is likely to slow down due to the rise in interest rates following the hike in cash reserve ratio and repo rate on Friday. Economists point out that easy liquidity also fuels inflation, if money goes to fund consumption rather than investment. According RBI data, lending by commercial banks to the sensitive sector rose 75% in 2005-06 over the previous year.

The highest share was that of real estate, which rose by 79% to Rs 2,60,222.6 crore while capital market rose by 39% to Rs 22,076 crore. Loans to commodities rose to Rs 4,391 crore in 2005-06, up by 89% over last year.

Bankers said they have slowed down on extending loans to the real estate segment following concerns expressed by both the government and RBI. As a result, loan applications from property developers, special economic zones, hotels and shopping complexes are on hold for a while now.

(Courtesy: Economic Times)

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