Downward rigidity hurts borrowers

ECONOMIC SURVEY 2003-04/ INFLATION AND INTEREST RATES

The downward rigidity in lending rates poses a major concern for the Indian economy as majority of borrowers are denied the benefit of falling deposit rates and the resultant lower cost of bank funds.

On the other hand, banks have gained in terms of interest spread, which has increased during 2001-02 and 2002-03. This is because the fall in banks' deposit rates is much sharper than their lending rates.

The Economic Survey pointed to a differential of 175-200 basis points between term deposit rates and prime lending rates of most commercial banks.

The lending rates of banks by and large remained stable as compared with the sharp fall in deposit rates during the period March 2002 and March 2004, stated the survey.

Term deposit rates of more than one year maturity declined from a range of 7.5-8.5 per cent to 5.0-5.5 per cent, reflecting a drop of 250-300 basis points.

In contrast, prime lending rates (PLR) of five key commercial banks declined from a range of 11-12 per cent to 10.25-11 per cent during the same period. This reflects a fall of just 75-100 basis points.

Only a handful of corporates with good track record are able to access bank credit at sub-PLR. In addition to bank credit, top corporates having direct access to market funding, have also seen their cost of mobilisation fall from 7.41-10.25 per cent in March 2002 to 4.7-6.5 per cent in March 2004.

Most borrowers are thus unable to benefit from the falling deposit rates. This is despite the fact that banks have been asked to reduce their respective PLR in keeping with the actual cost of funds.

The Reserve Bank of India has taken a series of measures including advising banks to lower their lending rates and aligning pricing of credit to the assessment of credit risk in order that credit delivery and credit culture is improved.

These stated the survey will help ease the rigidities in lending rates, and enable revival of the industrial sector.