The finance ministry will likely use a meeting with the heads of public sector banks to try and ascertain the accuracy of assumptions underlying recent measures taken by India’s central bank to control inflation, according to an official in the ministry close to the development. The government, the official said, wants to ensure that the paucity of data on the economy does not trigger a wrong or inadequate policy response and impact the 8.5% rate at which the economy has grown over the past three years.
The Reserve Bank of India (RBI) has raised the overall cost of bank credit and simultaneously picked retail credit such as home and car loans for special attention by making them more expensive than other sectors.
“There’s an assumption that retail lending has crowded out credit flow to other sectors,” said the finance ministry official. But data that is currently available doesn’t conclusively prove this. It (credit flowing into the housing and auto sectors at the cost of others) will show up in the price of manufactured products when the sector has practically no slack left, the official added. Inflation has stayed above the 6% mark in 2007, save for the week ended 31 March when it stood at 5.74%.
The link between inflation and the boom in real estate was flagged earlier in the year by RBI governor Y.V. Reddy in January. “It is essential to recognize the links between accelerating inflation and escalating asset prices,” Reddy had said.
In the absence of hard data about retail credit affecting credit to other sectors, the finance ministry top brass might use the meeting to sound the bank chiefs on the availability of bankable projects outside the real-estate sector, the official said. Some of the assumptions underlying recent policy measures would be meaningless if there is a shortage of bankable projects.
The monetary measures are a move towards turning the spotlight on the quality of economic growth, said Saumitra Choudhuri, economic adviser, Icra and a member of the Prime Minister’s economic advisory council. They aim to knock out the froth from growth and target some speculative uses of resources, he argued. “Higher prices can lead to more balanced judgements,” he added.
The measures have come in the backdrop of the third consecutive year of fast-paced growth.
The aggregate bank credit grew 29% on year on 16 March, taking the level of outstanding credit to Rs18.67 lakh crore. Simultaneously, aggregate deposits grew 24.8% on year, bringing the outstanding to Rs25.05 lakh crore.
While the growth rate in credit has moderated, the growth in deposits on 16 March 2007 gained against the previous year. The year-on-year growth on 16 March 2006 was 18%.
Deposit growth in banks has been driven by term deposits, which offer high rates. The finance ministry finds the banks’ deposit rates bothersome when it’s still trying to gauge the extent of bankable projects outside the real-estate sector.
The possibility of bad loans building up in real-estate sector is another factor that the finance ministry finds worrisome. Once again, there is no data to suggest that bad loans have relatively increased in real estate lending.
Indian scheduled commercial banks have actually brought down the gross bad loans as a proportion of gross advances significantly over the last decade. Gross bad loans made up 3.3% of gross advances in 2005-06 against gross bad loans of 15.7% in 1996-97.