After a rapid build-up in retail assets in recent years, Indian banks are pausing to assess the risks of lending to millions of small borrowers that have a scrappy credit history. The panic is not yet on, but the banks and the regulator are uneasy about how a rise in interest rates, sky-high property prices and a sharp downturn in the equity markets could affect banks’ balance sheets. Retail loans comprise about a quarter of bank credit, excluding food credit to farmers.
In April, Reserve Bank of India (RBI) governor Y V Reddy announced several measures aimed at protecting banks from a possible asset price bubble in the property and equity markets. Provisions that banks must make on standard advances were increased from 0.40% to 1% on personal loans, for loans that involve an exposure to the capital market, large home loans and loans to the commercial real estate sector. The risk weight on bank loans to the commercial real estate sector was also increased to 150% from 125%.
