RBI warns banks over credit/deposit risk

Expressing serious concern over banks pushing up their lending even when their deposit collection was faltering,he said RBI would monitor the credit growth and “if necessary,engage with banks which show an abnormal incremental credit- deposit ratio”.

RBI had to initiate measures recently to increase liquidity in the system as the growth in bank deposits was about 16 per cent against credit growth of about 24 per cent.

The review statement said that during the quarter,up to mid-December,banks mobilised Rs 88,514 crore of deposits and lent out Rs 2,14,638 crore. However,with active deposit mobilisation in the second fortnight of December,the mismatch has narrowed,it said.

Subbarao said that while RBI would extend liquidity support to meet the productive credit requirements,it is important that there is moderation in the credit growth.

There is limit to what the RBI can do to ease liquidity.

Credit and deposit growth of banks has to be aligned,he said.

Heads of commercial banks at the policy meeting today indicated their willingness to align credit growth with that of deposit growth,the Governor said.

However,some banks pointed out that financing the infrastructure sector was a major source of asset-liability mismatch and there is a need to incentivise raising of long-term resources by banks through appropriate fiscal measures,he added.

Subbarao said inflation was the dominant concern of the central bank in the policy review.

“Inflation is clearly the dominant concern. Primary food articles inflation has risen again sharply. Non-food articles and fuel inflation are already at an elevated levels. There are signs of food and fuel price increases spilling over into generalised inflation”,he observed.

RBI has raised the projection for wholesale-prices based inflation for March 2011 from 5.5 per cent to 7 per cent,even as Subbarao said that today’s move would rein in inflationary expectations and contain the spill-over from rise in food and fuel prices to general,or overall,inflation.

The Governor avoided a direct reply on further hike in key rates,saying that the bank has tightened repo rate by 175 bps and reverse repo rate by 225 bps since last March.

“We will persist with anti-inflationary stand”,he added. On whether RBI thought of increasing the policy rates by 50 basis points,as expected by some economists,Subbarao said that 25 basis point rise was a judgement call and it was not arrived at out of some analytical model.

The Governor also mentioned that for the monetary policy to be effective,fiscal consolidation is important and containing inflation is the shared responsibility of RBI and the government.

He said commodity prices pose significant risks for fiscal consolidation in the year ahead.

The efficacy of further fiscal adjustment will be influenced by the firming trend in commodity prices and the extent to which government will allow this to pass through to consumers,Subbarao said.

Meanwhile,referring to the queries on investigations in Citibank fraud and whether the RBI was planning any measures with regard to regulating wealth management services offered by banks,the RBI said that it would decide course of action after full picture emerges from the investigation.

Also,the central bank has decided to call state governments for discussions on Malegam committee report on microfinance institutions.

The Governor also mentioned that for the monetary policy to be effective,fiscal consolidation is important and containing inflation is the shared responsibility of RBI and the government.

According to the Governor,the commodity prices pose significant risks for fiscal consolidation in the year ahead.

The efficacy of further fiscal adjustment will be influenced by the firming trend in commodity prices and the extent to which government will allow this to pass through to consumers,he said.

Meanwhile,referring to queries on investigations in Citibank fraud and whether the RBI was planning any measures with regard to regulating wealth management services offered by banks,the RBI has said that it would decide course of action after full picture emerges from the investigation.

RBI has also decided to call state governments for discussion on Malegam committee report on microfinance institutions.