Soften lending rates

Despite adequate liquidity with banks, borrowers are not knocking on their doors

Although, RBI Governor Raghuram Rajan appears to be more reluctant, and even made the most dovish move while announcing second rate cut in the year, he is not comfortable on inflation. As expected by the industry and the government, the RBI cut repo rate by 25 basis points to 7.25%. Defending the rate cut decision, Rajan sees the industrial production is slowly recovering, though unevenly.

And he is now expecting a clear credit take-off in the case of stalled projects and fresh capital expenditure by private firms, both vital for sustaining growth-oriented trend. If one reads between the lines of RBI's policy statement, there is an underlying message from the former IMF chief economist that policy alone cannot revive growth and that it requires government’s active participation in managing food grains and controlling price rise.

The statement has a rider –the government must increase public spending and recapitalise the banks. Perhaps, Rajan wants the industry or the government not to have any future expectation on more rate cuts, as the IMD predicts delayed monsoon, which may cause inflation to rise. In fact, the RBI projected that inflation is expected to rise to 6% by January 2016, from its earlier stand of 5.8%.

He further asked the government to come up with new strategies to clean up stressed NPAs, besides improving credit offtake. Addressing the banks, Rajan again reminded them on the need to lower interest rates, as some are yet to take cue from RBI rate cuts. Responding to Rajan's call, the largest public sector bank SBI reduced the base rate by 15 basis points on Tuesday, and more are following the suit. Another worry for Rajan is the health of banks.

Though the banks have enough liquidity, they have failed to attract borrowers. Perhaps, this was why the government sought another rate cut to further soften the interest rates to make the credit still more affordable. Now that the RBI has cut the key rates, cumulatively by 75 basis points, it is for the industry to utilise the opportunity. In fact, the bank credit takeoff was lower in 2014-15 over its previous year. The credit was up 12.6% in 2014-15 as against 13.9% in 2013-14.

Interestingly, the banks are servicing soft portfolios like personal loans and working capital. As industry watchers put it, even the 12.6% growth is due to telecom companies taking loan in March-end in order to make their spectrum bids successful. On the other hand, the banks are holding stressed assets and it is difficult for them to boost further the credit expansion.

It is time for the government to come up with a fixed plan to clean up their books on bad loans and infuse fresh capital, instead of harping on the regulator’s action, for the revival of economy.