RBI deputy governor K.C. Chakrabarty (centre) with Assocham president Rajkumar Dhoot (left) and chairman and MD of Indian Overseas Bank M. Narendra in New Delhi on Wednesday. A Telegraph picture
New Delhi, Nov. 21: Rate cuts by banks are being constrained by rising bad assets, RBI deputy governor K.C. Chakrabarty said.
“If a 5 per cent NPA (non-performing assets) becomes 1 per cent NPA, banks will be able to reduce rates. A timely-paying borrower is compensating for the borrower who has defaulted,” Chakrabarty said at an industry seminar.
Companies are struggling to pay back their debts on account of a slow economic growth, which dropped to a nine-year low of 5.3 per cent in the quarter ended March before picking up slightly to 5.5 per cent in the three months ended June. High interest rates have also contributed to the defaults.
The RBI deputy governor feels there is enough liquidity to take care of the lending activities of banks. “I think liquidity is okay. Whatever is the liquidity, that is adequate and comfortable. This is always monitored.”
He added that the RBI would step in to provide more liquidity if the need arose.
Last month, the RBI injected Rs 17,500 crore into the system by reducing the cash reserve ratio (CRR) by 0.25 per cent. CRR, or the portion of deposits banks have to park with the RBI, now stands at 4.25 per cent, while the repo rate at which the RBI lends to banks has been kept at 8 per cent.
Bankers have, however, said the 25-basis-point cut in CRR is too little to lower loan rates, and only a repo rate cut will give them enough room to reduce borrowing costs.
Asking banks not to shy away from giving loans to productive sectors, Chakrabarty said “when NPAs are high your risk management system has to be improved, your credit appraisal system has to be improved”.
“Because of the fear of NPA, banks need not stop lending but banks must improve their credit management capability for which there is enough scope,” he said, adding that banks need to pay more attention to the credit needs of agriculture, small and medium enterprises and retail.
Chakrabarty also urged Indian companies to seek lower interest rates from banks than approach the central bank for further easing of the monetary policy.
He also disagreed with the argument that higher interest rates were the main reason for the slowdown in the economy, but accepted that “to the extent monetary policy is not able to control inflation, yes it’s the RBI’s responsibility”.