Strong liquidity should spur banks to cut lending rates: Rakesh Mohan

Strong liquidity should spur banks to cut lending rates: Rakesh Mohan
The Hindu Business Line, May 27, 2009, Page 6

Our Bureau, Mumbai

Continued robust profitability and strong liquidity should encourage banks to cut lending rates, according to Dr Rakesh Mohan, Deputy Governor, the Reserve Bank of India.

Pointing out that banks’ would need to focus on lending to agriculture, MSMEs, and other priority sector areas, the Deputy Governor said that once the corporate bond market develops further, large corporates will disintermediate from the banking system.

Underscoring the strength of the Indian banking system, Dr Mohan, who was speaking at the 62nd annual general meeting of the Indian Banks’ Association said, “There is no problem in the Indian banks. The Indian banking system has negligible exposure to toxic assets or the sub-prime crisis. There has been no relaxation in lending norms…. Banks’ risk-adjusted capital adequacy ratio is above normal. NPAs are low. Despite the adverse macro-economic environment, banks have posted robust profits. Liquidity is strong. Therefore, banks will be in a position to cut lending rates.”

Stress tests conducted recently by the RBI on the banking system shows that even if NPAs were to increase by 100 to 200 per cent, overall, banks’ capital adequacy ratio would be ‘reasonable’.

The Deputy Governor underscored the fact that the fisc is under stress on account of a host of factors – subsidies on oil, fertiliser and food; pay commission payouts, debt waiver, stimulus packages, large increase in market borrowing. The combined (Centre and States) fiscal deficit, according to Dr Mohan, is very high by international standards.

Due to the large borrowing needs of the Government (for FY 2009-10, the net budget borrowing estimate is Rs 3,08,647 crore), Dr Mohan said. He holds the view that the RBI should continue to manage the debt management function so that the Government borrowing is managed smoothly.

When advanced economies loosened their monetary policy, the emerging markets, including India received copious forex inflows. But once the reversal happened, it had a huge impact on equity markets because foreign inflows are a relatively higher proportion of floating stock. But as domestic investment was met by domestic savings this did not have much of an impact.

In 2009, it is estimated that there will be a reverse flow of capital to the tune of $200 billion from the emerging markets to the advanced economies.

As the sources of funds for corporates from overseas borrowing and equity reduced, there was high pressure on banks and this resulted in credit crunch. FDI, however, was not impacted as much as expected.

Dr Mohan felt that there was a need for financial development and deepening. Credit to the SME sector was not up to the mark. “Banks have to be active in doing proper risk assessment. There is huge amount of non-farm rural activity that is taking place which has no access to bank credit.”