Mumbai, Oct. 27: The Reserve Bank of India today tightened provisioning norms for banks and rolled back a few unconventional liquidity-boosting measures it took last October but chose not to tweak key rates after a review of the monetary policy here today.
It also directed banks to set aside more money when they shovel credit to the commercial real estate sector.
Bank and realty stocks plunged after the announcement of tough provisioning norms. Realty giant DLF crashed 6.6 per cent to Rs 410.80 and Unitech by 7.7 per cent to Rs 85.65 amid fears that the new rule would dam up credit flows to the sector.
The State Bank of India and ICICI Bank stock tumbled amid talk that higher provisioning would pare profits in the quarters ahead. The SBI scrip sank 4.5 per cent to Rs 2,202.95, while ICICI Bank yielded 6 per cent to close at Rs 836.25.
Inflation the scourge
The central bank projected a surge in inflation to 6.5 per cent by the end of March next year, while leaving its economic growth forecast unchanged at 6 per cent.
The twin forecasts prompted RBI governor Duvvuri Subbarao to tread carefully as he held his hand on policy rate changes even as he articulated the banks desire to cap inflation in the range of 4 to 4.5 per cent.
Taking the first tentative step to roll back the liberal monetary policy that the RBI had adopted last year to spur faltering growth, Subbarao today restored the statutory liquidity ratio (SLR) to its earlier level of 25 per cent. The SLR is that portion of bank deposits that must be invested in government bonds.
The central bank said the hike in SLR would not soak up liquidity since the banks had already parked 27.6 per cent of their net demand and time liabilities in these instruments.
CRR ambit widened
The RBI brought liabilities under the collateralised borrowing and lending obligation (CBLO) within the ambit of the cash reserve ratio.
The CBLO is similar to the inter-bank call money market, except that in this case, banks raise funds from one another against the collateral of government securities. The CBLO market has swelled to Rs 60,000 crore a day from Rs 6 crore a day in 2003 when it was launched.
The RBI directed banks to raise their provisioning on advances to the commercial real estate to 1 per cent from 0.40 per cent earlier. This essentially means that banks will now have to set aside more funds while lending to this sector.
The real bad news for banks was that they would have to increase the total provisioning coverage ratio on non-performing assets (NPAs) to at least 70 per cent by September 2010.
At present, this provisioning varies among bank to bank. It is high in the cases of Bank of Baroda, HDFC Bank and a few others and very low for banks such as the State Bank of India and ICICI Bank.
Banks with considerably low provision coverage ratio (lower than 50 per cent) such as the SBI, ICICI Bank and IDBI Bank will have to make higher provisions for NPAs. This will impact their profitability and result in earnings downgrades, said Gaurav Dua of Sharekhan.
Subbarao later told reporters that the real challenge for the central bank was to support the recovery process without compromising on price stability.
Bankers said they did not expect the central bank to raise interest rates any time soon.