Banks to raise the lending norms: tougher to get loans
By Neelima Shankar
Sep 23, 2008
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The Lehman Brothers bankruptcy has left the whole world under the global financial turmoil and now even bankers are becoming conscious to decide the creditworthiness of their customers.

Although interest rates are rising, most of the banks are also planning to tighten their lending norms in order to reduce the risk of default in this scenario. Availing any type of loan including home, auto and personal loans is going to be tougher now. Bankers are planning to follow more stringent norms for lending purposes.

Bank of India Chairman and Managing Director, T S Narayanaswamy said, "Credit growth will further moderate. Liquidity is available but we cannot go on a lending spree. Good due-diligence measures and strict verifying process would be adhered to for lending to any customer whether retail or corporate."

The squeeze in liquidity and a growing aversion to risk due to recent developments in global financial markets is also inducing banks to raise the deposit rates, thereby increasing the lending rates.

Bankers have anticipated a hike in interest rates even though the Central Bank abstains from hiking key rates in the October credit policy review. A Banker with a public sector bank said, "We are evaluating an increase in deposit rates to mobilize more resources. If this happens, the next step would be to increase the lending rates to keep the net interest margin unaffected." Yet another banker feels that the growth of credit would automatically moderate even if the RBI and the government intervene or not.

The banker said, "Earlier there was the expectation that RBI would increase the repo rate and the cash reserved ratio (CRR) once again in its credit review to tame inflation which is still ruling at around 12%, but now with the situation changed banks are themselves taking measures to moderate credit growth. In such a situation, it is unlikely that the regulator would further tighten the policy."

In its move to meet the liquidity requirements of the economy, RBI has reduced the statutory liquidity ratio (SLR) from 25% to 24%. The central bank has permitted the bankers to borrow against their SLR bonds. But now the bankers feel that liquidity is no more a prime cause as all the central banks across the world have started floating money to overcome the global crisis.

However, the government is considering easing the norms of external commercial borrowings (ECB) as the domestic credit requirements are outpacing the availability of funds. A top PSU official said, "The government and RBI are in active discussions on further relaxation of ECB norms. A decision in this regard is expected very soon. This would certainly contribute to ease the prevailing tight liquidity conditions."

The liberalization in ECB norms is expected to help corporates to access cheap funds abroad for financing their projects in productive sectors.

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