'Benign inflation needed for sustained growth'

State Bank of India (SBI) Chairman Pratip Chaudhuri today said some benign inflation was needed for sustained growth and a high interest rate regime was not conducive in the long run.

“The cost of credit has to be moderated in order to retain a competitive edge for corporates. A high interest rate leads to high unemployment, which in turn creates social unrest,” he said.

Chaudhuri also said the bank was against deregulation of savings bank interest rates. “SBI has suggested interest rate on savings should be 3.5-four per cent, and the rates should not be completely deregulated,” Chaudhuri said. Margins on interest rates were required to finance delinquencies, and deregulation would create an upward pressure on savings rates, he added.

Education loans
SBI suggested the government should devise a formula to guarantee certain retail loans, especially education loans, as is the case with the Credit Guarantee Fund Trust for Micro and Small Enterprises. This would lower banks’ capital requirement needs to a great extent, Chaudhuri said.

Infrastructure fund
SBI, along with the Indian Bank Association (IBA), is planning to seek the government's approval to float infrastructure bonds. “The government has allowed Power Finance Corporation and Rural Electrification Corporation to float infrastructure bonds. Banks should also be allowed to launch infrastructure bonds,” said Chaudhuri. Long term funds would help banks bridge the asset-liability gap, he said.

SBI Life Insurance IPO
SBI Life Insurance, a joint venture between SBI and BNP Paribas Cardif, would tap the capital market only after the government decides to raise the foreign direct investment limit in the sector. “All insurers are awaiting the government's decision on raising foreign partners' stakeholding from 26 per cent to 49 per cent for an IPO (initial public offering),” the chairman said.