Certain loose practices were developing in the housing sector…..George Mathew
Reserve Bank of India governor D SUBBARAO moved swiftly to curtail some malpractices in the housing loan segment in the monetary policy review on Tuesday. In an interview to GEORGE MATHEW, he spoke about the home loan segment, capital flows, GDP growth, asset price build-up and the microfinance sector. Excerpts:
Why did you tighten the home loan norms? Is there any problem in the segment?
We have been watching the situation. We noticed that certain loose practices were developing in the housing sector. We wanted to curb that…. thats the motivation behind the move. Some slackness in the loans to value ratio and whether teaser rates go through the same stringent valuation that they should be going through. Its not that we have actually seen so much of a problem. We have seen factors that could potentially lead to a problem.
There has been an asset price build-up. Do you think theres a need to curtail flows to restrict price rise?
There has been an asset price build-up. Gold is at all-time high and equity prices are high. Moderating capital flows depends on a number of factors, not just asset prices. The exchange rate, currency, current account deficit. So far this year, the flows have been in line with current account deficit. Should there be flows far out of line with current account deficit, we might need to intervene.
Microfinance companies are charging very high interest rates. Why is the RBI not doing anything to bring them down?
The RBI regulates only one segment of the MFI sector, which is the non-banking finance companies involved in the microfinance sector. Theres no such separate categorisation of NBFC-MFIs. There are 37 NBFCs which are MFIs and regulated by us and none of them are deposit taking. Only about 13 out of 37 NBFCs are systematically important with business of over Rs 100 crore. The segment of the MFI sector that comes under RBI regulation is small but in terms of total lending, it might be significantly higher. Now there are questions about regulating interest rates and our stance is to move away from regulating interest rates. We cant now turn towards this and start regulating interest rates. In any case, this is a question that Malegam committee will go through and we will take a view after the report is available.
Do you think capital flows are disruptive to warrant any intervention?
The flows so far have been in line with our current account deficit. Yes, sometimes there are lumpy flows as happened in the Coal India IPO. Im quite impressed by the way the market has adjusted to lumpy flows… the cause of realisation that this flows will reverse in a short period of time. So they have hedged some of the flows that have come and gone into the nostro account. I think the market has matured. They have anticipated and responded and the market performed without any hiccups. I think this is a tribute to the maturity of our markets.
Does the extend of capital flow worry the RBI?
There are some controls in place. They are operating. Our endeavour in the short to medium term is to ensure that the stable component of the flows in the overall flows goes up. That can’t go overnight. Our FDI must go up. ECB flows which are more stable should go up. Sebi must reduce reliance on volatile FII flows. We have increased FII-rupee debt limit and imposed restrictions which encourage investment in long maturity securities and in infrastructure. This is continuous process.
The US Fed is meeting in the coming days, and there are indications that there will be quantitative easing (QE2)… Do you think QE2 will be harmful and disruptive for emerging markets like India?
There might be some impact. People have told us the market has factored that in. QE2 of $500 billion-$1trillion has already come in. Unless the QE2 is out of line, it’s manageable. For India, this flow might reverse. We must be able to manage that as much we managed Coal India flows. It may not be as short legged as Coal India. Its going to be reversed. We can manage QE2 flows. Flows that come in as QE2 will not be a stable source that we want. The market has factored in the median estimate QE2 of $500 billion. If its $3 trillion, there will be a problem. On the other hand, if its zero, there will be a problem. US FOMC meeting is November 4. I don’t know when they will start.
You said volatility in IIP (index for industrial production) is significant. There is a concern in deceleration of growth in IIP. Are you worried about growth?
No. If we were worried about the growth, we would have revised downwards the growth rate. We stand by the growth rate of 8.5 per cent in July. We are on track for this growth. Agriculture is ok. Industrial IIP was erratic and lost some if its credibility. But if you take out the volatile elements, thats showing some sustained growth. Other indicators are showing industrial sector is ok. The PMI number is promising.