Credit Policy Review>>>

With this credit policy review Reserve Bank of India (RBI) took first step towards an eventual withdrawal of easy money policy. The process of exit from the easy and cheap money policy began with the withdrawal of unconventional cash facilities for banks, mutual funds, non banking finance companies and housing finance companies. These facilities have been introduced a year ago amid the collapse of the global credit market. Thus making it more expensive to lend to commercial real estate, forced banks to invest more in government bonds and asked lenders to set aside more funds for bad loans.

Commenting on the credit policy Mr. Harsh Roongta, CEO, Apna Paisa said, The biggest thing about this credit policy is the direction statement clearly whatever steps have been taken have been described as the first phase of an exit policy. So clearly there is more to come. The steps taken currently which directly affect the retail lending market, is possibly the increase in SLR by one percent from 24% to 25% as well the increase in general provisioning on real estate loans from 0.4% to 1%. As far as the SLR increase is concerned that's likely to have only a marginal impact because already there are excess securities that are being held by the banking sector, unless liquidity lightens it is unlikely to have major impact.

Retail loans higher general provisioning, clearly will have an impact which is on going. In the immediate past RBI has increased risk weightage on these assets and now with general provisioning also being increased, it will serve up to increase the cost of landing to the real estate sector. Possibly it is a welcome step to ensure that no bubble gets built up based on the credit from banks.

So what does it hold? It hints that rates will harden in few months. Lending rules have been tightened and a few fire fighting measures taken during the October 2008 crisis have been withdrawn.

Who will be affected? Builders and Banks, Loans to builders, particularly those setting up office buildings, malls and multiplexes, will become more expensive. Banks will have to set aside a bigger slice of their earnings for such a loan, even if the borrower does not default.

What happens to banks? Banks will have to step up their provisioning for bad loans. If a loan outstanding is Rs. 100 crores, a bank will have to provide minimum 70% (Rs. 70 crore). This will impact the profit of many big banks.

What happens to consumer? Banks are not expected to hike interest rates on home, auto and personal loans, immediately. But they may. That's when RBI may hike CRR the slice of customer deposits that bank set aside as cash with RBI to reduce surplus money with banks.

Key Points:

• Keeps benchmark interest rates unchanged

• Hikes SLR by 100 bps to 25%

• Retains GDP forecast for FY10 at 6%

• Cuts money supply growth target a hint that CRR may rise

The Statuary Liquidity Ration (SLR) which prescribes percentage of deposits that banks are required to invest in Government debt has been raised from 24% to 25% which is a reversal of an exceptional measure. Last year it was lowered to ease the credit flow to industry.

- Bienu Vaghela