By C Thomas and K Goyal/ Bloomberg
New Delhi: Indian banks should slow loan growth to high-risk businesses and give priority to lending to the productive sectors, finance minister P. Chidambaram said.
“Credit growth at 30% has to be moderated and therefore banks must rebalance their credit portfolio,” Chidambaram said after meeting chairman of state-run banks in New Delhi on 19 April. “I have asked banks to moderate credit growth to sectors identified as high risk by Reserve Bank, especially real-estate and capital markets.”
Bank loans expanded more than an average 35% in years ended March 2005 and 2006 on sustained demand from companies and individuals in an economy poised to grow more than 8% for a fourth year. Bank credit expanded 27.6% on year as on 30 March, according to central bank data.
The central bank raised borrowing costs six times over the past 14 months to slow loan growth and to contain inflation that accelerated to a two-year high of 6.69% in the week ended 27 January.
Inflation dropped to 5.74% in the week ended 31 March, the government said on 13 April. The central bank had set an inflation target of between 5% and 5.5% by 31 March. The RBI will announce its next quarterly monetary policy on 24 April.
Bankers, including Om Prakash Bhatt, chairman of the SBI , the nation’s biggest, said loan growth is beginning to moderate following monetary and fiscal measures. Interest rates have “peaked” or “near-peaked,” he said.
Banks must lend more to help build infrastructure, which requires a large amount of money, Chidambaram said after the meeting.
The government estimates India needs up to $320 billion (Rs1,350,077 crore)over the next five years to bolster infrastructure in areas such as roads, ports and electricity generation.
India loses 2% points from annual growth because of inadequate power and transportation networks, according to the finance ministry. India produces about 8% less electricity than it needs, cutting gross domestic product by a 10th, the ministry estimates.
Highways, which move almost 80% of the goods transported in India, account for only about 2% of the country’s 3.32 million kilometers (2.1 million miles) of roads. It takes an average 85 hours to unload and reload a ship at India’s major ports, 10 times longer than in Hong Kong or Singapore, according to government figures.