Banks have not responded as warranted by rate cuts: RBI

Banks have not responded as warranted by rate cuts: RBI
The Financial Express, April 7, 2009, Page 1

fe Bureau, Mumbai, Delhi

RBI governor D Subbarao has convened a meeting of top industrialists on Thursday in Mumbai to review the liquidity and interest rate scenario in the backdrop of commercial banks parking Rs 1,21,910 crore—the largest amount in a single day—on Monday with the central bank instead of lending to industry.

The government has been pushing public sector and even private sector banks to cut their lending rates. The amount parked by banks with RBI, or reverse repo, is more than double the usual daily amount. The sum earns a risk-free 3.5% rate of interest. Speaking at an industry conclave organised by Ficci, the governor said banks had enough room within the sectoral ceilings to lend more for investment in stock markets.

“There is no (need for) further relaxation of the ceiling by RBI, but for banks to feel confident about lending to corporates for investment in equities. There is room even within the existing regulatory regime for this demand to be met,” he said. The meeting of industry leaders with the RBI governor follows their meeting with Prime minister Manmohan Singh at the end of March.

Subbarao acknowledged that bank lending rates to industry have not fallen as much as the reduction in key policy rates by RBI warranted. He said this was due to the high interest rate paid on bank deposits. He also blamed the equally high rates on small savings schemes administered by the government. Only last week, ICICI Bank MD & CEO KV Kamath said high bank deposit rates and high yields on government paper made it difficult for most banks to cut lending rates.

“There are some issues that can be addressed by the new government such as an adjustment in small savings. Small savings and bank rates have to be comparable,” the RBI governor reiterated. According to RBI data, while banks pay interest of between 7.5% and even 9.6% for different types of deposits, the government pays an average of 8.5% on small savings schemes like Public Provident Fund, which has the added sweetener of tax exemption. Banks are wary of a flight of deposits if they slash rates too far below government rates.

Subbarao told the Ficci national executive committee meeting he would not prefer RBI to buy government bonds—or, monetising the fiscal deficit—to give the Centre the money it needed to finance public expenditure. At present, the government borrows from banks by selling them its bonds, which reduces the banks’ ability to lend to industry.

“Around the world, people are printing money. The Fed, ECB, Bank of England, Bank of Japan—everybody is doing it,” Subbarao said. But the Indian economy cannot print money without the backing of real resources, or else high inflation would return, he warned.

“Yes, we (do) print money for short-term requirements. But the issue is where the real resources are coming to us for doing the job. If you print money, it must be backed by real resources, and real resources can only come from two sources. Either you raise taxation, which you and we all of us have to pay, or through inflation.”

Talking about the government’s borrowing programme, Subbarao said that the final figure and possible implications would have to wait for the full Budget of a new government. “No matter what the new government is, no matter what the new Budget is, it is quite clear that the borrowing for 2009-10 is going to be substantially higher than 2008-09.”