There is scope for lending rates to come down further: RBI

After RBI's decision to hold interest rates, Urjit Patel and other deputy governors spoke to media

After the Reserve Bank of India (RBI)’s decision to hold interest rates, Governor Urjit Patel and other deputy governors spoke to the media on its decision to shift its policy stance from accommodative to neutral, demonetisation, stressed assets, and other key issues. Edited excerpts:  

Why was the stance shifted from accommodative to neutral?

Viral Acharya: This is driven by our concern about global uncertainty picking up, especially on fuel and metal side. There is also a risk that this could be coupled with strengthening of the dollar and could feed into inflation of our economy. So, unless you believe that food deflation is really here to stay, your expectation would be more based on the consumer price index (CPI), which has been very sticky.

Urjit Patel: The Monetary Policy Committee wanted to emphasise that in a calibrated manner and therefore to make it on a durable basis we need to move inflation closer to four per cent. Secondly the non-food, non-fuel part of CPI has been stubborn at 4.8-4.9 (per cent) since September. Therefore, that is the kind of risk that is there. If you combine that with the other risks as an abundant precaution, the committee felt that we needed all the flexibility that we could muster.

Since many banks have cut lending rates, is there scope for banks to cut rates further?

Patel: There is still scope for lending rates to come down because our policy rates came down by 175 bps (basis points) and weighted average lending rate has come down at most by 85-90 bps. So there is scope for more transmission. Some borrowers, such as healthy borrowers of housing finance, have already benefited from it.

Liquidity overhang from demonetisation will continue in FY18. What does that mean for your neutral stance on liquidity? What happens to the real interest rate given the global elements?

Michael Patra: We expect liquidity to even out. It has already started as currency in circulation has turned to positive territory. Liquidity will be surplus for the rest of the year and a little bit into the next year, which is not so much due to demonetisation but due to fiscal policy being played out. On real interest rates, we set out our range of 1.25-1.75 (per cent) and it stays there.

How big is the non-performing assets (NPA) problem for the economy?

Acharya: The problem in the absolute sense is quite large. It requires a significant recapitalisation of the banking system, especially public sector banks. But it also requires speedy and efficient resolution of NPAs and stressed assets. Demand and supply are very hard to separate out. If you have a sector where you over-lend as a banking sector as a whole and things come crashing out, that leaves that sector with excess capacity and there won’t be any demand. So it’s hard to say that this is just a pure demand and supply problem. If we resolve the NPAs of banks, it will help restore some of the capacity utilisation by reducing some excess capacity. That may actually create healthy conditions for investments in these sectors. And banks, because of the resolution of NPAs, may begin to start consider lending to these sectors again.

Mundra: The level of stressed assets in the industry is above 20 per cent if we put gross NPAs and restructured assets together. So, there is a concern on the twin balance sheet problem. So, focusing only on the bank’s balance sheet and talking about NPAs is just one part of it, where RBI has been focused for quite some time. As a result of that, continuous provisioning to some extent has equipped banks to deal with those accounts. But this concern would be completed with the other side of the twin balance sheet problem. While it is good that weakness has been recognised and provisions have been built, the key would be the resolution.

For resolution, a number of tools have been given by RBI in the past year and a half. Under each of these mechanisms, quite a few number of cases have been taken up by the banking industry. They are working on it. Other development in this is the bankruptcy code, and it is very important for it to become operational soon. Our sense is that a combined use of these tools, which would be very case-specific and specific to individual entities, is something we will continue to monitor.

How can the common citizen’s faith be restored in the banking system after the recent cases of fraud?

Mundra: The banking system is robust and few incidents do not weaken it. Given the large number of branches and people working, the cases of fraud are negligible. Action has been taken and those people have been suspended. Bank staff have gone out of their way to help people in the last two months.

Is RBI considering setting up a bad bank as recommend by the Economic Survey?

Acharya: We have to remain open to all solutions because the problem is quite large. A bad bank by itself will not work. It has to be designed right. The big piece is can you get the bank to sell the assets at the right price to asset reconstruction companies and private investors? How do you get the right price to come in using a bad bank approach or portfolio approach? That is going to be key. We are going to be thinking about what kind of design issues there will be. But if designed properly, it could help.

N S Vishwanathan: All options are open. Fundamentally, it is about designing it right and getting the right price.