Ex-RBI governor Rangarajan sees lending rates remaining high

He was replying to question on possibility of rate cuts after surge in deposits post-demonetisation

Former Reserve Bank governor C Rangarajan on Thursday said the high degree of non-performing assets will impede lending rate cuts despite a liquidity glut after the note-ban.

"The possibility of the banks reducing lending rates is not very much in the horizon. There may be some small adjustments. But I do not see the lending rates coming down because the banks do feel the pressure of the stressed assets," he said. 

He was replying to a specific question on the possibility of interest rate cuts after the surge in deposits after note ban.

"The basic profitability of a bank comes out of lending. Therefore the question really is whether banks will be in a position to lend more. Perhaps in the current fiscal, one can see pick up in the credit growth," he said.

There were sharp rate cuts in January after the surge of deposits, where the banks are reported to have mopped up a bulk of the over Rs 12 trillion in banned currency notes as deposits.

However, the RBI wants the banks to do more, saying the transmission of its previous cuts is yet to be complete.

The issue was also discussed at the last meeting of the monetary policy committee (MPC).

A high percentage of NPAs which are hovering around the ten per cent mark at present decreases the quantum of interest-paying loans for the banks, and hurts the core interest income and margins.

Rangarajan, the former chairman of Prime Minister's Economic Advisory Council, said a normal monsoon as predicted by the weather department will help boost overall economic growth this fiscal.

"In 2017-18, we should see some improvement over last year because the impact of the disturbances were felt in the last quarter and some part of the third quarter. Much will also depend on monsoons. If the monsoon is normal, then one could expect improvement in GDP growth," he said, referring to the waning impact of demonetisation on economic activity.

Rangarajan was speaking on the sidelines of Panel Discussion organised by the Icfai Foundation for Higher Education.

In the panel dissuasion, Rangarajan said research in any field cannot be taken up as a routine exercise.

He also suggested that there should be a system for tightening the standards for taking up research programmes in Universities and educational institutions.