RBI pauses on rate hike, but loans to cost more

Higher provisioning for commercial real estate, personal & home loans.

After two successive hikes in the key policy rates in October and January, the Reserve Bank of India today pressed the pause button, but took a sector-specific approach in its annual monetary policy to curb the phenomenal growth in bank credit.

The RBI raised the provisioning on standard loans in commercial real estate, home loans above Rs 20 lakh, personal loans, and loans for capital market-related activities, to 1 per cent of total standard assets just six months after the rate was raised to 0.40 per cent from 0.25 per cent.

It was a double whammy for commercial real estate loans with a 25-basis point increase in risk weight for capital adequacy purposes to 150 per cent, after an identical raise in July 2005. It also raised the risk for banks' exposure to venture capital funds to 150 per cent and included it in banks' capital market loans.

The cost of all these loans would go up between 25 and 50 basis points, banking industry sources said. Overall, high-value home loans constitute about 10 per cent of banks' home loan portfolios. ICICI Bank, the most aggressive player in retail loans, will be affected the most as it will require more capital allocation as well as higher provisioning.

ICICI Bank executives declined to comment.

In the first 10 months of 2005-06, outstanding personal loans, including housing loans, increased by Rs 68,386 crore to Rs 3,13,466 crore over the March 2005 level. Housing loans increased by Rs 37,431 crore to Rs 1,66,159 crore, accounting for 15 per cent of the incremental credit during the year.

Real estate loans almost doubled during the period with a rise of Rs 11,225 crore to Rs 24,527 crore.

The RBI kept its key reverse repo, the rate at which it drains funds from the market, steady at 5.5 per cent and the repo rate, at which it adds liquidity, unchanged at 6.5 per cent. But the central bank warned that India could not be out of step with a general rise in interest rates abroad and said the outlook for the pass-through of higher oil prices to the domestic economy was unclear and needed close monitoring.

Niall Booker, group general manager and CEO, HSBC India, said, "Banks have also been cautioned to reduce their recourse to wholesale funding. All these measures will translate into higher prices for credits and deposits which the RBI governor hopes will engineer a soft landing in credit growth from 30 to 20 per cent (projected in the annual policy)."

The need to offer attractive interest rates on long-term deposits, coupled with a hike in provisioning, would mean an upward revision in home loan rates, said M Balachandran, chairman of Bank of India, adding that BoI would soon review costs and announce new rates.

AK Khandelwal, chairman of Bank of Baroda, said BoB's asset-liability committee would meet later this week to consider increasing lending rates.

RBI Governor YV Reddy said the central bank did not raise key rates today because the pre-emptive steps taken in January this year had apparently fetched the desired results, but the decision against increasing rates was a "delicate" one.

The government securities market rallied after the announcement of the policy.

The benchmark 10-year government paper 7.59 per cent 2016 closed at Rs 101.22. implying 7.41 per cent yield, lower by 14 basis points than yesterday's level.

Maintaining that monetary conditions were consistent with price stability, the RBI forecast GDP growth of 7.5-8 per cent in the year to end of March 2007, the fourth in a row that the economy will have sustained this unprecedented pace. The projection for inflation for the year is 5-5.5 per cent, money supply (M3) 15 per cent and deposits, Rs 3,30,000 crore.

The central bank expected credit growth to slow to 20 per cent in 2006-07 from 30 per cent in 2005-06 and said it would keep a watch on asset prices, especially in housing and real estate. It reiterated that volatility in asset prices could cause financial instability.