Just-in-time RBI cuts to limit crisis to D Street

 JUST do what it takes to ensure that the fallout of the global crisis is confined to Dalal Street and does not boil over to main street. That seems to be the underlying message in RBI's fresh steps to free up loans, attract dollar and liven up the economy.
    Thanks to the weekend measures, banks are likely to be less apprehensive in lending to real estate companies and non banking finance companies (NBFC), which have been worst hit by the downturn. On Saturday evening, RBI reduced standard provisioning and risk weighatge for real estate companies and NBFCs. Banker say this move will enable them to reduce interest rates on these loans whenever these come up for roll over.
    "The benefits will be passed on to the borrowers in the form of lower interest rates," pointed out T S Narayanasami, chairman of Indian Banks Association and CMD of Bank of India.
    Standard provisioning has been reduced for four categories — real estate, NBFCs, capital market exposure and credit card receivable — from 2% to 0.40%. Risk weightage on real estate loans and unrated, non-deposit rating, systemically important NBFCs have been reduced to 100% from 150% — meaning, banks will need less capital to give such loans. Lower provisions will improve profitability of banks. Also, it will improve bank's capital adequacy ratio due to lowered risk weightage on several categories of loans announced on Saturday.
    So far, banks were not willing to touch real estate companies and NBFCs with a barge pole. Now, with these sector being treated at par with all the other sectors, banks may have little reasons to deny them loans.
    "The reduction in standard provisioning will change the attitude of banks towards real estate and NBFCs. But only well performing and professionally managed companies will be in better position to raise money from banks at better rates," said Union Bank of India CMD M V Nair.
    According to Punjab National Bank CMD K C Chakrabarty, "RBI is signalling that bubble element has petered out and that banks should not be too apprehensive in lending to these segment (NFBC and real estate). RBI is also indicating the risk element are coming down."
    Despite this, a senior banking analyst felt that the measures looked like hastily taken decisions. "RBI is signaling that it is safe to lend to real estate companies and NBFCs and and that there is no fear of a bubble. We think it is too early to say so. Also, currently market thinks otherwise. This is clearly indicated in the interest rate at which they are borrowing from the market," said Karvy Stock Broking's head of research Hemindra Hazari.