Bankers Expect Deregulation Of Interest Rates

Complete dere gulation of interest rates and a reduction in bank rate are the banking industrys main expectations from the coming busy-season credit policy to be announced in the second or third week of October.

Bankers feel that the Reserve Bank will have a tough job in reviving the stagnating credit off-take, as the lacklustre demand for bank funds is not linked to unviable interest rates. Rather it is a result of slowdown in industrial activity and a hesitancy among banks to lend to lowly-rated corporates in a bid to curb non-performing assets. In his address at the annual general meeting of the Indian Banks Association (IBA), Rashid Jilani, chairman, Punjab National Bank and the IBA, said, a further rationalisation of the interest rate structure is likely to bring down the existing mismatches between deposit and lending rates, which could help banks in taking rational decisions pertaining to resource mobilisation and credit deployment.

 

Along with the deregulation on deposit rates, the RBI is strongly expected to signal lower lending rates by effecting a cut in the bank rate. The RBI governor, C Rangarajans frequent call for lower lending rates have created strong expectations of a 50 to 100 basis point cut in the bank rate. However, bankers point out that efficacy of the bank rate is limited at present. They point out the need for integration between various aspects of the financial system before the bank rate can effectively serve as a benchmark in a framework of totally deregulated rates.

Yet, this alone is not expected to revive the demand for bank credit. As Paresh Sukhtankar, head - credit and market risk, HDFC Bank, says: The slow credit offtake is more due to a lack of demand. Borrowers are shying away not because of unviable interest rates but because of slowdown in industrial activity. Despite the reduction in rates over the past year, there has been no noteworthy pickup in credit-offtake. While there are still no perceptible signs of recovery right now, however, with the busy season coming up, there might be a pickup in the last quarter of this financial year.

Total bank credit to the commercial sector stood at Rs 2,76,201 crore on August 29, 1997, a year-on-year increase of 11 per cent. One year ago, this figure stood at Rs 2,48,734 crore. However, bank investments, a part of which includes lending to the commercial sector, have also gone up, standing at Rs 2,20,368 crore on August 29, an increase of 24.8 per cent year on year. One year ago, this figure stood at Rs 1,76,549 crore. However, most of the credit has gone to the higher rated corporates.

Bankers have called for measures which will facilitate pickup in industrial activity. K Kannan, chairman and managing director of Bank of Baroda, said: Besides, deregulation of interest rates, the policy should announce measures whereby a suitable climate is created for project take off. There are several projects for which our bank has already sanctioned money but since those projects have not yet taken off the loan remains unutilised.

Voicing the same opinion, A K Dam, executive director of UTI Bank said: Normally, the credit policy lays emphasis on how to accelerate credit offtake.