In the government’s latest effort to temper inflation and hold back surging interest rates, Union finance minister P. Chidambaram asked the heads of India’s public sector banks to focus on “productive sectors” while lending money and reduce the quantum of expensive deposits. His directives came in a meeting with the bank chiefs on Thursday. The ruling United Progressive Alliance must grapple with rising inflation and interest rates as it tries to ensure that the country’s economy continues to grow by at least 8.5%, the average rate of growth over the past three years. He also asked the banks to lend more to people from minority communities.
Chidambaram, who said after the meeting that banks need to bring down their exposure to the stock markets and real estate, added that he had “advised banks that the credit growth of 30% has to be moderated”. Credit grew 27.6% in the 12 months to 30 March, according to data provided by the Reserve Bank of India (RBI), fuelled by sustained growth in demand for loans from companies and individuals in an economy that grew by 9.2% in 2006-07 according to government estimates. Inflation, as measured by the rise in wholesale prices, touched a high of 6.63% in February before falling to 5.74% for the week ended 30 March, far higher than the central bank’s estimate of 5-5.5% for the year.
RBI had previously asked banks to regulate their credit to the real-estate sector and this issue came up for discussion in the meeting, said bankers and government officials present at the meeting, who did not wish to be identified. The central bank has already made loans to the sector more costly by raising provisioning norms, or the amount of money banks need to provide as cushion against loans. A finance ministry official, who did not wish to be identified, had previously said that the government believed that real- estate credit was crowding out credit to the manufacturing sector. Some bankers disagreed with this at the meeting and said that they believed adequate credit had been directed to other sectors.
Loans to the housing and real-estate sector in India rose by more than 50% to Rs2.13 lakh crore in 2006-07, according to data provided by RBI.
The bankers at the meeting asked for a change in guidelines on real-estate lending, said a government official. Prevailing RBI norms make a real-estate loan in excess of Rs20 lakh to an individual as expensive as a ‘commercial’ loan (or money loaned to buy commercial property), even if the borrower uses it to buy a house, by requiring the same provisioning norms for it (provisioning norms are stiffer for ‘commercial’ loans). Bankers asked for this limit to be raised to Rs30 lakh.
The government also sought to nudge banks towards lending more to minority communities during the meeting. Chidambaram said the government had identified 103 districts where the proportion of minority population exceeds 25%, and asked banks to increase their physical presence in them and lend more to minorities.
Vinod Rai, secretary, financial services, at the finance ministry, said after the meeting that bankers had been told that low-cost deposits (from savings and current accounts) had to constitute at least 40% of overall deposits.
The ministry expressed its worry that expensive bulk deposits from companies were fuelling credit growth, he added. Outstanding deposits grew by 24.8% in the 12 months to 16 March to Rs25.05 lakh crore. A large part of this growth came from expensive term deposits.
To meet the government’s expectation and lend more to certain sectors, banks will have to raise additional capital to meet the Basel-II norms on capital adequacy that will become effective from 1 April 2008 for most banks. Banks in India currently have to maintain Rs9 of capital adequacy for every Rs100 they lend. This will remain at Rs9 once the new norm kicks in, but provisioning would rise and state-owned banks would need to raise Rs50,000 crore of additional capital, said Rai. A part of that—the precise amount was not available—would have to be in the form of equity capital. The State Bank of India plans to make a share issue, its chairman Om Prakash Bhatt said, but did not specify a time frame.
The ability of banks to raise money through a sale of shares is limited because the government is unwilling to dilute its equity stake in them to below 51%. Of the 28 state-owned banks, the government has little headroom in about eight banks to dilute its stake further without breaching this limit. Finance ministry officials did not indicate what they had in mind to help these banks raise more equity to meet Basel-II norms. Some of the bankers wanted the investment ceiling for foreign institutional investors (FIIs) increased above the current 20% to help them raise equity, a government official said.
(Bloomberg contributed to this story.)