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Even after the Reserve Bank of India reluctantly reduced policy rates by 125 points since 2012, there has been no sign of the economy picking up. Finance minister, P Chidambaram decided to take matters in his hand by asking public sector banks to pass on the interest rate reduction in order to provide a powerful stimulus to the economy. Base rate is the minimum lending rate below which a bank cannot lend to any borrower.
Within hours of saying so, Bank of India announced a cut of 0.25% in base rate to 10%. Other public sector banks are likely to follow. However, SBI which already has a lower base rate at 9.7% has clearly said that it will not be lowering rates any further.
However, there is enough evidence to prove that this rate cut is unlikely to provide a‘powerful stimulus’ as anticipated by the finance minister.
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SBI which has the lowest base rate among the nationalised banks has not seen any sharp growth in credit. Despite lower interest rates this fiscal, the bank has given a guidance of marginal credit growth, that too largely expected from home, personal and car loans.
Secondly, credit growth has for the first time this year fallen below 14%. Incidentally,deposit growth too was lower at 13.6%. This limits the options for bankers to operate. Reducing lending rate would be at the cost of margins, because there is no room to reduce deposit rates as that would further discourage investors from depositing their money in the bank. In any case cost of funds has increased by 40 to 50 basis points as banks were forced to increase deposit rates to attract flows. Reducing rates would thus affect net interest margins.
Further, if one looks at the break up of credit given out, it is largely in the form of working capital and not for asset creation, which actually provides the ‘stimulus’ as expected by the finance minister. Data released by the RBI shows that credit growth has slowed across the board and even the service sector has not been spared. But most shocking has been the sharp fall in growth for NBFC (non-banking finance companies) companies to 2.8% from 35.6% a year ago. NBFCs tread where bankers fear to go. Slowing NBFC growth shows that the rot in the economy has spread to such a level that even NBFCs fear to lend money.
By agreeing to reduce base rates, nationalised banks have again succumbed to political pressure, without much visibility of benefits from the move. Lower profitability will only keep investors away from such banks.
