2011 revisted | Banks look set to moderate interset rates

Auto and home loan borrowers can look forward to better days in the New Year as interest rates, which shot up during 2011, are poised to moderate.

They peaked with base or minimum lending rate of all the banks going past 10%. Even the peak fixed deposit rates hovering at that level.

The central bank hiked the lending rate seven times during the year, with both repo and reverse repo rates going up by 2.25%. Repo is the short-term rate at which RBI lends to banks, while reverse repo is the rate at which it borrows from them.

However, in the last monetary policy review a fortnight ago, RBI left the rates at the existing levels and indicated that they may come down in the future.

 

"While inflation remains on its projected trajectory, downside risks to growth have clearly increased... Further rates hike may not be warranted," the mid-quarterly review of monetary policy said.

RBI Governor D Subbarao said, "I cannot really speculate on when we might start cutting rates, but that is an event, that an action that is on the way forward."

This raised hopes of the exiting as well as prospective borrowers that interest rates will fall in the coming months.

"I expect interest rate to start bottoming out from March 2012," said PwC Associate Director (Financial Services), Robin Roy.

Rising interest rates, meanwhile, resulted in the deterioration of the asset quality of banks.

The Systemic Risk Survey, conducted by RBI for the first time, has identified deterioration of asset quality as the highest risk.

The year-on-year growth rate of NPAs, at 30.5% as of September-end, was higher than credit growth at 19.2%. Slippages, or fresh accretion to NPAs, also outpaced credit growth and grew at 92.8% (year-on-year).

Despite the recent spurt in NPAs, the impairment levels in Indian banks compare favourably with the banking sectors in both the advanced as well as peer economies.

Major sectors that contributed to the rise in NPAs were the priority sector, retail, infrastructure and real estate.

In the infrastructure segment, the power and telecom sectors saw increased impairments and restructuring.

There is an possibility of further deterioration in asset quality as deceleration in credit growth is expected on account of slowing economy, the RBI report said.