Mint Road wants households to curb appetite for credit

MONETARY POLICY MID-TERM REVIEW 2006-07/ MICRO VIEW

Housing markets continue to remain overheated and, therefore, a source of risk.

The share of households in bank credit is rising rapidly and this has prompted the Reserve Bank of India (RBI) to sound a serious warning.

Households, not corporates - historically the most important borrowers from banks - have absorbed a significant portion of the credit growth. "There seems to be some risks to sustainability of the recent rapid pace of growth in bank credit to households," the RBI said.

Housing markets continue to remain overheated and, therefore, a source of risk, RBI said pointing to the 54.3 per cent rise in housing loans in the current year so far.

Home loans is driving retail credit growth, which is increasing by 47 per cent on a year-on-year basis. As a result, the share of retail credit in total bank credit has increased from 26.8 per cent in June 2005 to 27.3 per cent in June 2006.

Large accumulation of debt could leave households prone to future interest rate/ exchange rate shocks since banks have, in effect, transferred a large part of their market risks to households.

Households could become overextended as reflected in credit card busts in several emerging economies, RBI pointed out.

"Credit growth is at over 30 per cent for the third year in succession against a much slower deposit growth and that's a matter of concern whether the growth comes from retail or corporate borrowers," said V P Shetty, chairman of Industrial Development Bank of India.

RBI said excessive reliance on debt-financed consumption could turn out to be a serious problem if refinancing options dry up.

Also, moral hazard and adverse selection is a constant challenge facing banks.

The demand for bank credit has been growing at above 30 per cent for the third year in succession.

RBI said available information points to high growth in credit extended by banks to fast growing sectors such as housing, commercial real estate and retail loans. Asset prices remain at elevated levels and current levels of commodity prices make an overall assessment a complex task.

RETAIL BLUES

Households, not corporates - historically the most important borrowers from banks - have absorbed a significant portion of the credit growth

Large accumulation of debt could leave households prone to future interest rate/ exchange rate shocks since banks have, in effect, transferred a large part of their market risks to households