In a move that could help bring down commercial interest rates, the RBI on Saturday announced a slew of measures, including a one percentage point cut in short-term rates at which it lends and borrows from banks and pumped in Rs 11,000 crore to prop up realty and small industry sectors.
The repo rate, at which the apex bank lends overnight funds to banks, was reduced from 7.5 per cent to 6.5 per cent while the reverse repo rate, at which its accepts deposits from banks, was slashed to 5 per cent from 6 per cent with effect from 8th December.
"It is our expectation that the banks will take a signal from the rate cuts," RBI Governor D Subbarao said announcing the measures, which he said, along with steps taken since October, would infuse over Rs 3,00,000 crores into the system.
The liberal monetary policy stance has been prompted by the lowering of inflation, which Subbarao said would come down further due to the reduction in petrol and diesel prices announced on Friday.
Saturday’s package from RBI is aimed at furthering the economic growth, as Subbarao said, "There is evidence of economic activity slowing down, real GDP growth has moderated in the first half of 2008-09".
"Industrial activity, particularly in the manufacturing and infrastructure sector is decelerating... recent data indicate that the demand for bank credit is slackening despite comfortable liquidity. Higher input costs and dampened demand have denied corporate margins, while the uncertainty surrounding the crisis has affected business confidence," he said.
Sensing the impending crisis, the RBI had started liberalising the policy a reversal of earlier stance to control high inflation from October as part of which it cut Cash Reserve Ratio from 9 per cent 5.5 per cent till now.
But this is the first cut in reverse repo since 2003.
In order to improve credit flow to the fund-starved micro and small enterprises, the RBI announced a Rs 7,000 crore refinancing facility to SIDBI.
The banking regulator also announced a similar Rs 4,000 crore facility to National Housing Bank and would come out with the details of this package next week.
The apex bank also decided to classify housing loans below Rs 20 lakh from housing finance companies to individuals under the priority sector, but said banks can lend only five per cent of their total priority sector lending under this category.
Given the stress in realty sector, the apex bank also allowed banks to consider their commercial real estate exposure, which are restructured up to 30th June, under the standard category that would help lenders not consider these accounts as bad assets.
RBI steps to boost credit flow to realty sector
In order to increase the flow of funds to the sagging real estate sector, the RBI today announced a slew of measures including a Rs 4,000-crore refinance facility for the National Housing Bank and priority sector status for housing loans up to Rs 20 lakh.
"We are working on a refinance facility for the National Housing Bank (NHB) of an amount of Rs 4,000 crore," RBI Governor D Subbarao said.
According to current norms, a bank has to set aside 40 per cent of its deposits for lending under the priority sector head.
The RBI said banks can classify housing loans up to Rs 20 lakh as "priority sector" advances, subject to a ceiling of 5 per cent of their total priority sector target.
Loans by banks to housing finance companies (HFCs) for on-lending to individuals for purchasing or constructing dwelling units may be classified under the priority sector, provided the housing loans granted by HFCs do not exceed Rs 20 lakh per dwelling unit per family, the statement said.
The special dispensation for treating loans to HFCs as priority sector advances will boost lending to the housing sector, Subbarao said, adding this would apply to loans granted by banks to HFCs up to 31st March, 2010.
The RBI has also relaxed asset classification norms for commercial real estate advances to encourage banks to increase their exposure to the sector.
"The facilities for restructuring exposures will help soften pressures being faced by the commercial real estate and other sectors in the current environment", the Governor said.
Commenting on the RBI decisions, ICICI Bank Joint Managing Director Chanda Kochhar said, "We have brought down interest rates for housing loans below Rs 20 lakhs."
RBI said that under the existing norms, exposure to commercial real estate, capital market exposures and personal/ consumer loans are not eligible for the exceptional regulatory
treatment in retaining the asset classification of the restructured standard accounts in standard category.
"As the real estate sector is facing difficulties, it has been decided to extend exceptional/concessional treatment to the commercial real estate exposures which are restructured up to June 30, 2009," it added
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