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Wednesday, October 7, 2009

FM to nudge banks to hold rates

AT MEET NEXT WEEK, FINMIN TO LEAN ON STATE-OWNED BANKS TO KEEP RATES ON RETAIL LOANS SOFT

 THE finance ministry may use its influence over government-run banks that account for close to 70% of the banking business in the country to keep interest rates on retail loans low to facilitate economic growth. 
    Finance minister Pranab Mukherjee will meet heads of public sector banks next week and nudge them to keep interest rates low to enhance the availability of cheap credit, a finance ministry official said. 
    "This doesn't mean the government will put undue pressure on banks," he said, requesting anonymity. 

    The government usually uses public sector banks to dictate market interest rates, as it has no control over key policy rates that are fixed by the Reserve Bank of India. 
    Public sector banks, led by SBI and PNB, have been aggressive in the retail loan segment, which accounts for 20% of the total advances by banks 
in the current year. The segment has been showing signs of a pickup from May. Auto and home loans segments are witnessing a strong revival after lull that lasted over an year. In an attempt to enlarge their loan book they have been aggressively buying out the loans given by private sector banks also. 
    India's economy 

grew 6.7% in the last financial year after growing at 9% or more in the previous three years due to the impact of the global downturn. Policymakers expect the economy to grow at close to 6.3% in 
the current fiscal. Easy availability of cheap credit is considered crucial for the economy to attain high growth rates. 
    "The demand revival that we are witnessing, whether in auto sales or home sales, is at a nascent stage. Considering the backward linkages in the economy to these segments, the government may have to take 
measures to keep demand high," said DK Joshi, principal economist at credit ratings agency CRISIL. 
    The move by the finance ministry assumes added significance in the light of recent pronouncements by RBI officials and bankers who have hinted at an interest rate hike. "We may need 
to exit from accommodative monetary policy earlier than advanced economies. This calls for careful management of trade-offs: growth concerns warrant a delayed exit, but inflation concerns call for an earlier exit," RBI governor Duvvuri Subbarao told a banking seminar in Istanbul recently. 
    His views find support from influential bankers. Deepak Parekh, chairman of India's largest mortgage firm HDFC, on Wednesday said the RBI may resort to rate hikes in the fourth quarter of this fiscal to rein in runaway consumer prices. 
    The hike in rates could be by 
at least 0.5%, he said, adding, however, that any hike in rates was unlikely to happen in the current quarter. 
    Reverse repo, the rate at which RBI borrows funds from banks to absorb excess liquidity in the system, and repo rate, at which RBI injects liquidity, are currently at 3.25% and 4.75%, respectively. These rates were at 6% and 9% when RBI started easing policy in response to the global financial crisis. 
    However, the government may try hard to keep rates at current levels. The FM had made public his support for an easy money policy recently while addressing the G-20 summit. 
    Bankers and economists are sharply divided on the policy best suited for the country. 
    Heads of two PSU banks supported the view saying they don't see any reason for hikes in rates on retail loans because of the low credit offtake. 
    However, another section of bankers and analysts feels attempts to dictate interest rates could be harmful to the economy as it will add to inflation. 

RATE ROULETTE 
INDIRECT INTERVENTION 
Public-sector banks account for 70% of banking business in country 
Govt uses these banks to dictate interest rates in the market 
In July, PSU banks cut lending rates by 200 bps, forcing the private banks to follow suit 

GOING FOR CHEAP 
Retail loans are showing signs of pickup from May. Keeping these loans cheap will ensure easy credit and spur demand 
Bankers say cut-throat competition in home & auto loans might lead to further softening of rates 
NOTE OF CAUTION 
Some analysts feel dictating interest rates could harm the economy as it will add to inflationalready at a 11-year high 
Others say government's intervention may affect profitability of public sector banks 

FLUSH WITH FUNDS 
There are signs of liquidity in the system, which is forcing RBI to mull a hike in rates 
Banks are depositing over Rs 1.5 lakh crore with RBI everyday under reverse the repo window 
There could be a marginal hike in interest rates in the January-March 2010 quarter





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