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The increased provisioning requirement stipulated by the Reserve Bank of India (RBI) for exposure towards certain key sectors, in its third quarter review of monetary policy, will impact banks’ profitability. In its attempt to rein in credit growth, RBI has increased the provisioning requirement from 1% to 2% for standard assets in the real estate sector, outstanding credit card receivables, capital market exposures and personal loans. In addition, the provisioning requirement for exposure towards systemically important non-deposit taking NBFCs has also been increased from 0.4% to 2%. Crisil estimates that the above would result in additional provisioning equivalent of 10% of the net profit of the entire banking industry in 2005-06.
The additional provisioning requirement coupled with a 25 basis point hike in repo rate would result in tempering the high credit growth witnessed in the banking system. Bank credit growth continues to be high at 31.2% (year-on-year), especially on the back of strong growth during the previous two years. Asset quality parameters could have been compromised, especially in retail assets, to achieve the high credit growth over the last 2-3 years.
The RBI has once again highlighted the importance of financial stability. The policy indicates a clear shift from emphasis on stability and growth to that of ensuring price stability and anchoring inflation expectations. Inflation has risen significantly to 6% and is well above the 5-5.5% range targeted by the RBI.
Liquidity would be a key focus area for RBI in the short term. Fourth quarter of 2005-06 saw tightening of liquidity and increase in short term lending rates.
Since then, the excess SLR has fallen from 6.3% as of March 2006 to 3.4% as of January 5, 2007. RBI can be expected to take appropriate steps to make liquidity available for legitimate credit growth. |
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