‘There is scope for banks to reduce lending rates’

‘There is scope for banks to reduce lending rates’
The Economic Times, July 29, 2009, Page 13

As Deposits Mature And Get Re-Priced, Banks’ Cost Of Funds Will Go Down And They’ll Have Room For Cutting Lending Rates

Unlike his predecessors, RBI governor D Subbarao is quite direct on what action banks should take place on the interest rate front. The governor has repeatedly stressed on the central bank’s efforts to work in a transparent manner. Following his monetary policy meeting with chairmen of banks, Mr Subbarao addressed the media on RBI’s take on the economy and what transpired in his meeting with bankers . Excerpts:

On the scope for bank lending rates to come down…
There is scope for a reduction in lending rates within the policy rate adjustment already done by RBI. Even if we take into account the inflation rate and returns to depositors, the lending rate should be around 9.5%, but they are 10.5% and above… so there is scope for banks to reduce lending rates. We have also said in the policy statement that as deposits mature and get repriced, the cost of funds will go down for banks and they will have room for reduction of lending rates.

On when can the market expect a reversal of the exapansionary monetary policy…
We will look at non-oil imports, we will look at credit growth, we will look at inflation and we will look at manufacturing. However, it will be inappropriate and improper to speculate on the future. We have been debating to exit strategies in our internal meetings, but are not in a position to give any more details. In fact, central banks around the world have been talking of exit strategies… you must have heard Fed chairman Ben Bernanke’s statements and US president Barack Obama’s roadmap.

On the math behind RBI’s 6% growth rate estimate…
We debated a lot internally on the growth rate for the economy. Besides numbers, we also looked at when the forecasts were made. Several of the forecasts were made before the monsoon situation became clear. But let us first consider the risk factors for the economy. A lot will depend on agriculture. We all know the rainfall situation at present is 19% below normal. The foodgrain production-weighted rainfall index number is at 69 against 129 at this time last year. The agriculture performance could spill into industry and services, with a lag effect. Exports have been negative for the past eight months. Although exports only account for 15% of the economy, they are significant, but they will depend on the state of the global economy. Lastly, investments (in the economy) also have to pick up, although some bankers said credit from the housing and retail side have picked up.

On RBI’s stance on open market operations…
We will follow the calendar that we have laid out in respect of OMOs and MSS desequestering. But let me clarify that the calendar is only indicative. It is very difficult to predict liquidity, but we do try to estimate it regularly. Should the numbers deviate from our estimates, we will tailor the OMO programme accordingly. But, by and large, we will stick to the calendar. We want to give the market as much certainty as we have, but cannot give you what we do not have.

On the need for a government roadmap for fiscal consolidation…
The government has given a number of 6.8% for the current year and I believe in the mediumterm policy document, there are numbers for the next year and the year after.... we have said it will be good for the economy, the government, the central bank for everybody if those numbers are fleshed out. They have to be backed up by expenditure and revenue numbers. Also, in the process, the focus is on the quality of fiscal adjustment, i.e, how much do you spend on capital expenditure and how much do you spend on plan expenditure. Since I have been with the finance ministry in the past, now I can step back and speak more comfortably about fiscal adjustments from the Centre. But, it’s really the quality of fiscal adjustments that will be important. We do not expect market borrowings to be higher than what was mentioned in the Budget. Even the fiscal implications of the measures announced this week are small. Having said that, should there be any increase in borrowings from the government, RBI should (be able to) manage that.

On analysts’ concerns that restructuring is dressing up of books…
The focus on restructuring is not to hide anything. It is to provide liquidity to sectors that would have found it otherwise unviable. It’s so that they can get over difficult conditions and get back to business. Besides, its not that restructuring does not require provisioning. In fact, we are providing floating provisioning facility to banks for the restructured assets. So, the risk management systems are still in place. Some of the restructured loans could turn sour, but bankers tell us these are at acceptable levels. However, there is no proposal to extend the restructuring deadline from hereon. On continuation of floating provisions facility, we have an open stance and are awaiting international norms.

On the weakening correlation between CPI and WPI inflation indices…
Historically, the CPI has tracked WPI. The last time when I had come for the April policy, we had done some research which showed that the tracking has somewhat lagged. Now, we find that the correlation between CPI and WPI is further weakening. I had said earlier that all four CPI indices are at an elevated level and in the past month have moved up. So there is concern over prices that ordinary consumers are seeing in the market and that is a concern that we have kept in our mind while formulating this policy.