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Economy alert with human face

Mumbai, Oct. 26: Two spooks for the economy and two terrors for the average loan seeker. But the RBI did not forget the human face that the Manmohan Singh government is keen to project.

The central bank today slashed its growth forecast for the economy for 2004-05 to 6-6.5 per cent from the 6.5-7 per cent predicted in May.

It then topped that gloomy forecast with a warning that inflation could rise to 6.5 per cent by the end of March, winching it up from 5 per cent.

Unveiling its mid-term credit policy, the central bank also raised a key interest rate ' the repo rate ' for the first time in more than four years to 4.75 per cent from 4.5 per cent. This is the rate that the central bank pays commercial banks for loans.

The increase makes it dearer for banks to borrow from each other, which will put pressure on them to later raise rates on loans to companies and consumers.

However, the RBI held its benchmark bank rate, at which it lends to commercial banks, at 6 per cent.

RBI governor Yaga Venugopal Reddy spooked banks by warning them about a looming 'asset bubble' bust because of the runaway rise in housing and consumer loans.

Banks have been shovelling huge amount of loans to finance housing purchases ' one of the fastest growing segments in the banking industry ' and doling out personal loans to enable customers to buy consumer durables.

The RBI advocated several risk containment measures: it proposed to raise the housing loan risk weight to 75 per cent from 50 per cent and the risk weight for consumer credit such as personal loans and credit cards to 125 per cent from 100 per cent.

The new risk weightages are applicable only to banks and not to housing finance companies like HDFC.

In effect, it means that banks will now have to exercise greater caution while giving out these loans, entailing closer scrutiny of loan applications. 'With the experiences of many countries, we want to be careful and it's a temporary measure,' Reddy said.

'We (the banks) need to put more capital to comply with this new change. Capital has a cost,' said Shailendra Bhandari, managing director of Centurion Bank, hinting at a possible increase in housing loan rates in the near future.

Not everyone held this view. K. Cherian Verghese, the CMD of Corporation Bank, agreed with Bhandari that the returns on these loans would shrink, but reckoned it wouldn't spark a rate rise for two reasons. 'First, there is enough liquidity in the markets and, second, there is very stiff competition.'

The credit policy ' the first since the Manmohan Singh government came to power in May ' addressed some of the concerns articulated by the UPA by promising more credit to the weaker sections.

For the first time, the central bank spoke about providing loans to the 'distressed' urban poor to help them pay off their dues to loan sharks ' a move that will bring them into the formal financial system. The loans will be provided to them against appropriate collateral or group security.

Banks were also directed to make greater efforts to increase their disbursements to small and marginal farmers to 40 per cent of their direct advances under special agricultural credit plans.

See Business Telegraph

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