RBI hopes rate cuts will improve flow of credit to productive sectors

Event Date: 6-Dec-08

Mumbai: Stating that their bank is not in a position to cut lending rates, Keki Mistry, managing director, HDFC, said, “Unless the lending rates of banks and our cost of funds come down, we won’t be in a position to reduce rates.” The RBI cut its benchmark lending rate — the repo rate, the interest it charges for lending to banks — from 7.5% to 6.5%. The central bank also cut its reverse repo rate — the rate at which it borrows cash from banks — from 6% to 5%. These cuts, the RBI hopes, “will improve the flow of credit to productive sectors of the economy on viable terms”. 

    So, will interest rates come down? And, when? Everyone believes that the rates — both lending as well as deposit — will go down, but nobody is quite ready to predict when. “The direction is very clear. Banks are likely to reduce their PLR and deposit rates,” said Sachidanand Shukla, chief economist, Enam Securities. “But we can’t expect banks to do that overnight. We have to wait and watch.” 
    Most bankers believe that banks will have to reduce their deposit rates before cutting their lending rates. “Many banks have recently hiked their deposit rates to attract customers. Now, they will start cutting the deposit rates,” said a banker, who didn’t want to be quoted. 
    “We have to first see some meaningful reduction in key deposit rates first. Probably, the lending rates would come down after that. It will take a few weeks or even months,” said Harsh Roongta, CEO of ApnaLoan, an independent online portal for loan seekers. 
    Some industry players said the RBI had addressed the liquidity issue, but now it has to address the issue of credit availability for customers. 
    “What is the point of rates coming down by a per cent or two when banks are not willing to lend to customers?” asked an industry expert. “Banks are going slow or sitting on disbursing loans, be it housing, personal or motor loans. They just don’t want any default on their book,” he added. 
    Some experts also believe that banks are unlikely to chase customers with loan offers like they used to in the past. “Even if there is a reduction in rates, I don’t expect that banks will be eager to lend money. They may be ready to offer money to customers with excellent track records, but won’t be over-enthusiastic with others,” said a senior banker. 
    Roongta said even customers were not flocking to banks for loans because of the current economic conditions. “The demand is low now because of the higher interest rate. But it remains to be seen whether the demand will pick up after the rate cuts,” he said. 

India Inc expects more than what RBI offers 
Mumbai/New Delhi: India Inc feels that the steps announced by the Reserve Bank of India (RBI) on Saturday are not enough to revive beleaguered core sectors like steel, cement, auto and power. 
    “The RBI should have also announced cuts in SLR (statutory liquidity ratio) and CRR (cash reserve ratio) to inject liquidity into the system. Steps announced are not big enough to induce a revival. We were expecting a steeper cut of 2% in the reverse repo rate,” said Seshagiri Rao, director (finance), JSW Steel. RBI announced a 100 basis points cut in repo and reverse repo rates. 
    Adi Godrej, chairman, Godrej group concurred: “I would have preferred a deeper cut of 150 bps.” 
    FICCI described the RBI effort as a good start in the correct direction. It said it was hopeful that commercial banks would cut their lending rates following the steps taken by the RBI. Until now, banks have been very sluggish and have not reduced lending rates in a substantive manner. However, the FICCI said it was disappointed to note that there was no major succour for the automobiles and the white goods sector. 
    Assocham president Sajjan Jindal hoped that the money would flow into the system to support the projects that had been put on hold. According to DD Rathi, whole-time director and CFO, Grasim Industries: “In principle, the direction appears to be softening of interest rates and boosting liquidity. However, what is needed is a change in recovery laws which will speed up the decision making process while dealing with defaults. This will enable banks and other financial institutions to lend.” TNN

Source: TOI. Page 6, Dated 7-Dec-08