Author: Aaron Chaze

RBI TIGHTENS CREDIT-PROVISIONING NORMS FOR INDIAN BANKS

By Aaron Chaze

As growth slows in India, the central bank is pushing banks to prepare for higher credit costs.

One of the measures adopted by the Reserve Bank of India is an increase in provisions held against restructured loans—from 2.0% to 2.7%. The RBI has said that it will consider further tightening the provision to 5.0% within the next two years, reporting that 5.4% of loans classified by Indian banks as standard loans are being reworked as of June 2012. During the 2011–2012 fiscal year banks reworked $22 billion worth of loans, and the expectation is that in the 2012–2013 fiscal year the level of reworked loans will rise to $35 billion.

The central bank took center stage in the political arena at the end of October when it ignored the Indian finance ministry’s hints to lower the benchmark lending rate from the current 8.0%. The Indian government has introduced several economic reform measures since September in a bid to push up GDP growth rates. The expectation was that the central bank would back up the government’s reform measures with rate cuts. Although it did not oblige, the central bank did ease cash reserve ratio requirements on banks by 25 basis points to 4.2%. This adjustment is expected to inject $3.5 billion of liquidity into the banking system and could prompt banks to lower lending rates.