RBI calls for tightening underwriting standards

15 Jun 2011

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A rebound in credit growth of 2010-11 is necessary for a developing country like India for sustaining high GDP growth, but underwriting standards needed to be tightened to ensure that the quality of credit did not deteriorate, the Reserve Bank of India (RBI) said in its 'Financial Stability Report' released yesterday.

The report said the credit portfolio of commercial banks was well diversified across industries, geographies and sectors, but in the last few years incremental credit growth had been observed to be mainly driven by a few sectors - retail, commercial real estate and infrastructure.

The sectors accounted for 19 per cent, 4 per cent and 13 per cent, respectively, of the gross advances of commercial banks, in March 2011.

The incremental share of real estate across both credit and impaired assets was high and real estate loans made up 17.7 per cent of gross advances in March 2011. Credit to the sector was up 24.6 per cent, which was faster than the overall credit growth of 22.6 per cent.

The rate of growth at 19.8 per cent of NPAs (non-performing assets) in this segment was also higher than the overall NPA growth rate of 14.8 per cent.

"The real estate sector posed some concerns given the large and growing share of these loans in the credit portfolios of banks, its NPAs witnessing higher than system level NPAs growth and potential of greater slippages into NPAs," the RBI said.

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