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Reserve Bank cautioned banks on Wednesday 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 told PTI 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 on Tuesday, 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 fears of overheating is due to some misunderstanding and some wrong interpretation, he said.
Elaborating on the economic situation, Reddy said there was better demand and supply balance and better credit deposit ratio.
On loan defaults, Reddy said: "We have no reason to believe that it is of a magnitude which has systemic significance nor is it likely to seriously impact a particular balance sheet (of a bank)."
But, he said it depended on individual banks to the extent it would affect.
"We have encouraged them (banks) that it is time to be cautious...we have also advised them through higher provisioning and higher risk weights," he said.
"These measures should moderate even possible marginal impact that arise in regard to a few banks if at all," Reddy added.
Though there were some defaults in consumer and home loans, "it will not be exactly right to call it a subprime crisis but there are reports from very, very, very few banks that defaults have slightly increased with regard to consumer loans."
"...And that is something which is not surprising from our point of view as this was exactly what we had alerted the banks about," he said.
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