Crossed signals

Updated: Sep 30 2006, 05:30am hrs
It is one of the Indian financial sectors worst kept secrets that the RBI and the finance ministry differ on a great many things. Still, it was an act of courage for SBI chairman OP Bhatt when he, while introducing RBI governor YV Reddy at a public function recently, spoke about this. In this difference of opinion, he said, we poor bankers do not know where to look. It is very rare for the CEO of the countrys largest bank, and a public sector one, to openly speak on such issues, indicating a maturing of mindsets on policy debates. The issues are crucial, and the impact is showing, with ICICI and other banks deciding to wait for clearer signals before deciding on lending to new SEZs.

Ground realities explain why perceptions differ so widely. The RBI governor is edgy as the credit to GDP ratio has grown by 12.2 percentage points in two years, matching the rise over the previous two decades. Global experience shows, as the recent RBI annual report noted, that any credit boom where this ratio is four percentage points above trend levels is the best indicator of financial imbalance and an impending banking crisis. No wonder the governor, like any risk-averse banker, has been prompt to quickly restrain a bank-financed SEZ boom. On the other hand, the FM, with the lessons of the mid-90s slowdown on his mind, is wary of any intervention that would derail growth. The pick-up in productive sectors has been aided by the credit surge, with flows to agriculture and medium and large industry doubling over two years. Credit to important sectors like power generation, food processing and automobiles has almost trebled in two years; that to iron and steel, petrol, gems and jewellery, roads and ports projects, telecom, pharmaceuticals, construction and fertiliser companies has doubled. And talk of a bank-funded consumption boom seems way off the mark. Growth of credit card outstandings has slowed and personal loans for consumer durables even declined last year. The only evidence for a bank-fueled surge was pick-up in credit to the real estate sector, up almost fourfold. And India still has a long way before the demand for banking credit satiates. The credit to GDP ratio of 60% is much lower than in some fast-growing countries like China, where credit supply is 147% of GDP. So, Mr Chidambaram is certainly is on strong ground when he argues for liberal credit and softer rates to further boost production. But, then, who will provide clear guidelines to bankers and clear the confusion