Banks Be Watchful of Loan Defaults, No Overheating
October 31 2007
MUMBAI: Reserve Bank on Wednesday cautioned banks against rising defaults in consumer and home loans with interest rates on the higher side, but refused to liken it with the sub-prime crisis in the US.
It will not be right to call it a subprime crisis but defaults have slightly increased in consumer and home loans, RBI Governor Y V Reddy said when asked about former Deputy Governor S S Tarapore's fears on this count.
"Tarapore flagging off the problem is relevant but... the magnitude, in my humble view, is perhaps exaggerated. But it is important enough to be watchful," Reddy said. Loans to borrowers who have poor or deficient credit history is called subprime lending by banks. The US economy was hit by large defaults due to subprime lending.
Only yesterday, RBI had taken exception to banks raising home loan rates by taking refuge in technicalities of contract and termed such actions as inappropriate. It had also warned banks to check abusive practices by agents engaged to recover loans. On high capital inflows, Reddy today ruled out that they were causing the economy to overheat.
"Now all the (economic) indicators point to greater normalcy than before and the only area of some concern is overhang of liquidity which we have addressed to some extent," he said.
There were early signs of overheating in the past which Reserve Bank has been able to manage, Reddy said, adding that now the economy was stable and "we would expect the situation to continue." Any fear of overheating is due to some misunderstanding and some wrong interpretation, he said.