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| Bankers ask for a pause in rate increase cycle |
| BS Reporter / Mumbai Jul 19, 2011, 00:25 IST |
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Hurt by slowing credit demand and increasing margin pressures, bankers have requested the Reserve Bank of India (RBI) not to increase the key policy rate in the first quarter review of the monetary and credit policy on July 26.
At the customary pre-policy meeting with RBI on Monday, bankers gave their perspective on deposit growth, credit growth and asset quality in the first quarter and the outlook for the rest of the financial year.
“The new (loan) sanctions have seen a decline in the first quarter. Credit pick-up in power and infrastructure projects has not been as much as last year,” said M D Mallya, chairman and managing director, Bank of Baroda. Credit growth might slow going forward, he added. According to RBI data, bank advances rose only 3.75 per cent in the first quarter of 2011-12 as compared to 5 per cent in the same period of the last financial year.
Another top public sector bank chief who attended the meeting said credit growth was not picking up and a pause in interest rate increases might improve the market sentiment.
The repo rate, the rate at which banks borrow from RBI, has been increased by 275 basis points since March 2010. "There are concerns over contracting margins as the cost of funds has gone up and credit growth has been slow. Increasing interest rates may not be the only way to bring down inflation," said Mallya.
The wholesale price index, India's inflation indicator, rose 9.44 per cent in June as compared to the same period last year. RBI expects inflation to stay close to 9 per cent in the first half before easing in the later part of the current financial year.
K Ramakrishnan, CEO of the Indian Banks' Association, said bankers urged RBI to come out with a clear statement on future interest rate and inflation scenarios in the next policy document so that industry could plan better. In the mid-quarter policy statement last month, RBI had maintained its anti-inflationary stance.
Banks also expressed concerns over the asset quality in view of rising interest rates. They said rising input costs and the cost of funds might affect the loan repayment capacity, especially of small and medium enterprises.
On deposit growth, bankers said higher interest rates had helped them mobilise funds, though there were concerns over the low-cost current account and saving account (Casa) deposits. “Overall deposit mobilisation has been good but Casa growth may not be as strong as before,” said Mallya.
Bankers also urged RBI not to take any steps for deregulation of interest rates on savings accounts, saying the industry might not be ready for such a change. RBI had raised the interest rate on savings accounts, the only regulated interest rate, to four per cent in May from 3.5 per cent. State Bank of India Chairman Pratip Chaudhuri, HDFC Bank’s Aditya Puri and Bank of India's Alok Misra were among those who met RBI Deputy Governor Subir Gokarn.
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