Reserve
Bank of India (RBI) today warned banks against rapid credit expansion.
RBI said some banks have expanded credit rapidly in relation to the
system level growth, with attendant worsening of their credit-deposit
ratios. These developments warrant heightened policy concerns in the
interest of overall systemic stability and the quality of financial
intermediation, it said.
RBI has urged these banks to review
their business strategies so that they are in a position to combine
longer term viable financing with profitability in operations,
recognising the reality of business cycles and counter-cyclical
monetary policy responses. A key aspect of this review should be a
renewed emphasis on credit quality while simultaneously pursuing
greater credit penetration and financial inclusion, RBI said.
RBI
said banks should focus on stricter credit appraisals on a sectoral
basis, monitor loan to value ratios and generally ensure the health of
credit portfolios on a durable basis without encountering undue
asset-liability mismatches. RBI said it may consider undertaking
supervisory review of those select banks which are over extended in
terms of their credit portfolios relative to their sources of funds.
At
its quarterly monetary policy review, RBI today, 29 July 2008, raised
repo rate by 50 basis points to a seven-year high of 9% to curb
inflation, now running close to 12%, and dampen inflationary
expectations. RBI also raised the cash reserve ratio (CRR), the
proportion of funds that banks must keep on deposit with it, by 25
basis points to 9%. The central bank left its reverse repo and bank
rates unchanged.
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