No CUT In Interest Rate By RBI

RBI cuts SLR, allows new ‘unbreakable’ bank FDs-Times of India 04.02.2015 ( See my comments below)

MUMBAI: Banks will have headroom to lend an additional Rs 42,000 crore following the RBI's move to cut SLR by 50 basis points. SLR, or statutory liquidity ratio, is the portion of deposits banks must invest in government bonds. RBI also introduced a new category of 'unbreakable' fixed deposits—which cannot be withdrawn prematurely—where banks will offer higher interest rates.

Although RBI governor Raghuram Rajan left key rates unchanged in his policy review on Tuesday, he surprised banks by bringing down the SLR prescription to 21.5% from 22%. He left the repo rate—the rate at which RBI lends overnight funds to banks—unchanged at 7.75%.

RBI also retained the cash reserve ratio(CRR)—the portion of deposits that banks have to maintain with RBI—at 4%.

Explaining the rationale behind the pause, Rajan made it clear that while the economy is doing well on three variables—current account deficit, inflation, exchange rate and reserves—he is waiting to see what measures are being taken by the government to structurally address the fiscal deficit. The governor said that there was a need to delve deep into the new GDP numbers under the new method of calculation which show that the economy grew by 6.9% in FY14 stating that given the indicators it was "hard to see the economy as rollicking in FY14".

Rajan made it clear that it was not just numerical targets that he was looking at but at the whole package. RBI expects that economic growth will pick up to 6.5% in FY16, which will result in an increased demand for funds in the banking sector. The cut in SLR is expected to help banks prepare their cash reserves to fund this growth.

In the short term the reduction in SLR is not going to make a difference to most banks. This is because banks have invested in government bonds far in excess of what they are required to. Today, out of every incremental Rs 100 that banks are able to raise as deposits, they are able to lend only Rs 66.37 as against the headroom available of Rs 74.

While Rajan did not cut rates, he announced a slew of initiatives to assist banks in their lending to long-term projects. The 'unbreakable' fixed deposits will ensure that banks have resources to fund projects at fixed cost. There are also relaxations that allow banks to lend afresh to new promoters who take over projects from financially distressed owners. To incentivize banks to clean bad loans from their books, RBI has allowed lenders to write back excess provisions if bad loans are sold.

"By reducing SLR, RBI has not only released funds for lending but has also helped banks migrate to Liquidity Coverage Ratio (LCR) norms with ease," said TM Bhasin, chairman, Indian Banks Association and chief of Chennai-based Indian Bank. The liquidity coverage ratio norms are part of the international Basel III prudential norms for banks which require lenders to maintain in highly liquid assets funds up to one month of cash outflows under stressed conditions. The surplus investments that banks have in government bonds qualify as liquid reserves. Bhasin added that the policy stance leans towards liberalization and gives major relief to banks by allowing them to extend the tenure for stuck projects that are sold. "Incidentally, it could also encourage banks to push for change in management if they sense risk in the project due to promoter's inefficiencies" he said.

My Comment:

I praise RBI Governor Mr.  Raghuram Rajan that once again he has proved by action that he is not going to change his idea of keeping interest rate intact in the interest of economic health of the country though he has been facing severe and consistent pressure from politicians and corporate lobby to reduce interest rate . He understands well that any more reduction in interest rate will force banks to reduce rate on deposits which will have bad impact on savings rate and investment capacity of Government of India. It is also made clear that banks have enough liquidity in hand and if they want , they can deliver more and more credit to needy persons and companies. Further by reducing SLR , RBI has given additional liquidity in the hands of banks.
 
He has taken a good step to reintroduce long term deposit to finance long term infrastructure projects. It will help banks in getting rid of asset liability mismatch. Past record of PS banks will prove that they indulged in long term lending by using short term deposits just to please the then UPA government. It is lending to infrastructure made by PS banks under the orders of previous Finance Minister which has added pain to already ailing banks. Further to add fuel to fire, money lent by PS banks to business houses are not coming back in time with speed of demand made by banks. It is therefore neither interest rate nor liquidity is to be blamed for slower credit growth , but it is purely and surely fear of default  and lack of enough expertise in branches of public sector banks to assess loan proposals which is responsible for slower credit growth during last few quarters.
 
It is the record of banks that they always act  as per whims of ministers in power instead of sticking to best banking principles for survival. They use to take credit from ministers by achieving targets by hook or by crooks and get elevation in post and get incentives from GOI. PS banks prevail upon all branch heads for achievement of their targets but do not think it wise and necessary to ensure quality lending.

RBI Governor  has proved by his action that mere reduction of interest is not going to help in growth of credit portfolio of banks until government makes other parameters conducive for credit growth and until banks develop enough expertise at field level to increase real and genuine credit growth. He has proved by his action that window dressing methods adopted by bankers during last few years to artificially show higher credit growth will not serve any interest in credit growth or in GDP growth and neither it is going to help in containing growth in Non performing assets of PS banks.
 
GOI will have to activate administrative machineries to give hassle free statutory clearances quickly and without giving much trouble to business men who desire to enter into manufacturing activities and it is the duty of GOI to help banks in recovering money from defaulters by making legal set up more active and effective .I salute Mr. Rajan for his boldness and proactive steps he has been taking for last one year. Banks can achieve advance target under pressure but cannot recover the money from defaulters under existing legal set up even if pressure from the government is increased to any extent.

It is also true that top officials of PS banks neither gave value to credit quality nor they gave required time and importance for recovery of loans from defaulters. Further it is also true that neither RBI nor other agencies like MOF, Audit teams and vigilance team took honest efforts to stop bankers indulging in bad lending and bad human resource management.

But during last few months , banks as well as other agencies have become somewhat serious on recovery and hence they got little success in containing fresh slippages. But real change will be visible only when they stick to quality lending and stop focusing on achievement of target only . Further real change will occur only when GOI get success in making its own machineries active and effective in real sense , not confined to only talks. They have to walk the talk which they do in public domain .