Tuesday, February 5, 2013

The Reserve Bank of India (RBI) may not be the best place to go for a free lunch. Finance Minister Chidambaram has just learnt this the hard way. The latest cut in both repo rate and cash reserve ratio (CRR) was seen as the RBI's losing bet. But trust Governor Duvvuri Subbarao to not humour the Finance Ministry, just like his predecessors. The RBI understands that cheap credit is harbinger of bad lending. The Indian banking sector is already reeling under the burden of restructured assets. As per rating agency ICRA the same is set to cross Rs 2 trillion!

In the event of such catastrophe, under capitalized banks could even go bust. Hence as a proactive measure the RBI has mandated additional provisioning. Come April 2013, banks will provide as much as 5% for new restructured loans. For the existing stock of restructured assets, the RBI has suggested a phased coverage. In FY14, provisions will rise from 2.75% to 3.75 %. The same will go up to 5% in FY15. Thus, before banks get too complacent about cheaper liquidity, the RBI has tightened the noose.

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