Reviving loan growth to top agenda in RBI-bankers meet

Central bank to seek feedback from banks on liquidity situation, deposit growth and recent policy changes.

Revival of credit demand is likely to dominate discussions when bankers meet top officials of the Reserve Bank of India (RBI) next Tuesday. The meeting will take stock of economic parameters ahead of the central bank’s third quarter review of annual monetary policy on January 24.

The central bank is expected to seek feedback from banks on loan demand, liquidity situation, deposit growth and some recent policy changes with respect to deregulation of savings bank deposit rate and non-resident (external) deposit rates.

“The recovery in credit growth is critical for the economy. The growth in bank loans has remained slow, partly because of rising interest rates and partly due to uncertain macroeconomic environment, which has restricted business activities. We are planning to discuss this issue and find a solution,” said the chairman and managing director of a public sector bank.

The high interest rate regime has slowed down credit offtake. The growth in bank advances fell to a 21-month low in mid-December. According to data released by RBI, bank credit expanded 17.08 per cent annually as on December 16. It was below the central bank’s 18 per cent growth forecast for 2011-12.

With inflation easing, bankers said, there was a strong case for the banking regulator to cut interest rates. This will, in turn, help revive the demand for bank credit.

“It’s too early to forecast if RBI will actually cut the rates later this month. But the market widely expects a rate cut. This is reflected in yields that have come down sharply in the past few days despite talks of higher government borrowing. We think it is the right time to cut rates, as inflation appears to have peaked and credit growth is slow,” said a senior official of a city-based bank.

The yield on 10-year government bond closed at 8.36 per cent on Wednesday, compared to 8.57 per cent on December 30.

The central bank raised its key policy rates 13 times between March 2010 and October 2011, before taking a pause in the mid-quarter review in December.

RBI has signalled a reversal policy stance amid mounting concerns over economic growth. “From here on, we could expect reversal of monetary tightening. But it’s difficult to say when that will take place and in what shape it will roll out,” RBI governor Duvvuri Subbarao said in an interview published on the BBC website on Monday.

A moderation in inflation has raised hopes RBI may start reducing its key interest rates in the forthcoming credit policies. Headline inflation dropped to 9.1 per cent in November, from 9.73 per cent in the previous month, while food inflation declined to 0.42 per cent.

In a recent interaction with economists, RBI indicated there was no structural or systemic risk to the liquidity position in the money market. This was despite liquidity deficit hovering around Rs 1 lakh crore, above the central bank’s comfort zone of +/- 1 per cent of net demand and time liabilities.

“RBI officials reiterated they did not see any systemic or structural risk to the liquidity position in the money markets. The officials argued if liquidity was indeed structurally tight, then the associated stress would have been visible in the marginal standing facility window — an emergency facility which market participants can tap to avail liquidity, albeit at a higher cost than the liquidity adjustment facility window,” Taimur Baig and Kaushik Das, economists at Deutsche Bank, who met senior RBI officials, said.

The economists also said RBI officials noted cuts in the cash reserve ratio (CRR) were advisable at this juncture, as such a move would be tantamount to giving a monetary easing signal, which in the central bank’s assessment, was premature at this stage, given the evolving growth inflation dynamics.

“RBI seemed to be indicating that probably, the CRR tool would be used only as a last resort, in case any major external risks were to pose a destabilising threat to domestic financial markets,” the economists said.

According to bankers, other topics of discussion may include some long pending reform in the banking sector, including new banking licences and holding company structure.