Deposit the problem

Deposit the problem
The Financial Express, April 9, 2009, page 6

On Monday, banks parked Rs 1,22,000 crore with RBI for which they received an interest rate of only 3.5%, the reverse repo rate. Set this against the fact that banks are: (a) not lending much and, therefore, missing out on higher spreads, (b) not lending despite the cost of funds-deposit rates-having now come down and availability of funds-bank deposits-having gone up. As these columns have been arguing, this is perverse from the point of view of the economy. Some data throws the picture in sharp relief. For the 11 months of 2008-09, credit growth was 13% as against 17% for the corresponding period of last 2007-08. In absolute terms, this means Rs 3.06 lakh crore as against Rs 3.23 lakh crore. Plus, most of the credit offtake by corporates during the last quarter was largely for meeting working capital requirements, not term credit. Banks have almost certainly not met the projected 24% credit growth target for 2008-09, and that too by a wide margin, and bank deposits almost certainly have grown at more than the 19% projected rate. Total time deposits with scheduled commercial banks (fixed deposits) in January 2008 was Rs 25,56,689 crore, in February 2009, the figure was Rs 32,61,173 crore: a big jump.

Deposit rates had climbed up—looking at one-year fixed deposit rates—from around 9% in January 2008 to 10.5% in October 2008 but are now have dropped to around 8.75%. It is clear, therefore, that in 2009-10, India can bank itself into a low growth zone that is entirely avoidable. A few sectors are reporting relatively good economic news and there’s little doubt that latent demand in the economy remains high. What is crucial is getting business confidence back. And for that, interest rates are the first, though not the only, variable. Private investment has driven India’s growth and private investment will respond if the double-digit interest rate environment changes. The situation is, of course, made complicated by the fact that public sector banks have enjoyed an unearned bonus in terms of being declared ‘ultra safe’ and attracting fresh deposits and expect they will be applauded more for more ‘conservative’ banking—this time, niggardly lending. And private sector banks are not the game-changers they were in the last three or four years. The game has to change from a combined push from RBI and the government.