RBI warns banks against sub-PLR lending

The Reserve Bank of India (RBI) has warned banks against the tendency to offer short-term loans at below-PNR rates, especially in the housing sector and has asked lenders to fully assess its implications on the bank and the borrower.

"In the area of housing loans, teaser rates are increasingly being offered which is a cause for concern. I hope banks are ensuring that borrowers are well aware of the implications of such rates and the appraisal takes into account repaying capacity of the borrowers when the rates become normal," RBI deputy governor Usha Thorat told the Bancon conclave in Mumbai on Tuesday.

Thorat was speaking at a panel discussion on 'Risk Management: Priorities for the Indian Banking Sector', chaired by her at the 'BANCON-Indian Banking Conclave 2009-10' in Mumbai.

Attributing the tendency to lend short-term at sub-PLR rates to the excess liquidity in the system, she said banks would do well to recognise re-pricing and rollover risks. Banks in India are yet to adopt advanced approaches, she added.

According to Thorat, gross NPAs in the banking system in the country have increased marginally from 2.4 per cent as of 31 March 2008 to 2.6 per cent as of 30 September 2009.

She said the RBI had introduced a 70 per cent provisioning coverage ratio for NPAs in a bid to check rising NPA levels in the banking system. Banks have to include this in their forward-looking statement in their annual financial statements.