The Reserve Bank of India (RBI) is likely to relax the provisioning norms against loans given to real estate and other sectors. In a meeting with FM P Chidambaram on Tuesday, PSU banks have asked for relaxation of the provisioning norms, without compromising on the quality of credit to utilize their capital more aggressively.
For example, at present banks must have a capital base of Rs 9 to offer a loan of Rs 100. But, in case of real estate sector, RBI has increased the requirement of capital base on certain category of loans by almost 50%. So to offer a loan of Rs 100 to realty, banks should maintain a base of Rs 13.5. On home loans of more than Rs 20 lakh, banks need to keep a capital base of almost 13.5% of the loan amount.
CMD of a public sector bank said this norm has increased the cost of funds, while lending to real estate, even if bad loan in this sector is less than 1%, which is lower than the banking sector average. If government wants to increase the credit flow to realty at competitive rate, the provisioning norms must be relaxed, the banker added.
Chidambaram on Tuesday said the real estate sector affects 50% of GDP, considering dependence of sectors like steel, cement and other small scale industries. He asked banks to enhance credit flow to realty.
The bankers also demanded change in the provisioning norms for other NPAs (non-performing assets). While RBI has tightened norms in the last couple of years, projects are getting delayed because of non-availability of funds, In some cases, corporates are asking for rescheduling of loans.
According to the existing norms, such accounts should be treated as bad loans and capital provisioning has to be made, which affects banks’ profitability. Besides, it reduces capital base of a bank and capacity to give loan.
Therefore, banks said if they are asked to reschedule loans or to give credit to vulnerable sectors, the provisioning norms should be relaxed and be made more practical. It is learnt that finance minister has given them the assurance that RBI will look into the matter soon. After the global financial crisis, central banks world over have relaxed the provisioning norms to enable banks to increase their exposures to companies.
However, keeping in mind the safety factor, Chidambaram asked banks to increase their capital bases to ensure that their total loan portfolio should not be more than 8.33 times of the capital base or in banking terms their capital adequacy ratio (CAR) should not be less than 12%.