The Reserve Bank of India, following its larger-than-expected cut in the repo rate last week, is likely to exert considerable pressure on banks to cut their lending rates to stimulate growth. As Table 1 shows, the base rate and the deposit rates of banks have largely tracked the repo rate, if with a slight lag, especially since the RBI ended sub-prime lending to corporations in July 2010. RBI and the government are worried that there isn’t sufficient lending to kick-start investment and hence growth.
They are right to worry: banks have not been awash with liquidity. As illustrated by Table 2, borrowing by banks from the RBI’s Liquidity Adjustment Facility has been at a consistent high recently.
And, as Table 3 shows, before an odd spurt this month, credit growth has been in steady decline from a high of 24.5 per cent year-on-year on December 31, 2010.
But are banks flush enough to actually lend? Banks are worried that, if they lower deposit rates, they will lose customers. If they don’t, their net interest margins – and therefore profits, will take a hit. However, as Table 4 shows, net interest margins have been healthy, and largely increasing, over the past three years. Profits before tax have not been in trouble, either; Table 5 shows the numbers for the top four private-sector banks.(Click here for tables)
Even if banks step up lending, however, there is a hidden problem: bad loans. As Table 6 shows, non-performing assets have been steadily rising, especially for the public sector banks. And those may underestimate the size of the problem. The number of references to corporate debt restructuring cells — a guide to future NPAs — has built up to quite a total, as Table 7 shows. More lending is possible — but is forcing it wise?