The Hindu Business Line : Interest rates unlikely to fall further: RBI report

THE Reserve Bank of India has alerted banks that interest rates may have bottomed out and are unlikely to decline any further during the financial year 2004-05.

In its report on the `Trend and Progress of Banking in India, 2003-04', released today, it said given the significant share of investments especially in Government securities in the assets portfolio of commercial banks, the interest rate sensitivity of their balance sheets is critical.

"Over the past few years there has been a steady decline in interest rates largely reflecting sustained reduction in inflation rates and expectations. Such reductions in interest rates occurred in an environment where the credit growth remained sluggish. Consequently, there was a favourable impact on banks' balance sheets in terms of increased operating profits from treasury operations," the central bank said.

The enhanced treasury incomes enabled banks to make larger loan loss provisions due to which the net NPA ratios declined from 5.5 per cent in 2001-02 to 2.9 per cent by 2003-04.

However, there does not appear to be any further scope for similar trends to be observed during 2004-05, and in future, an increasing portion of banks' incomes would emanate from the traditional business of lending, the RBI said.

The central bank has suggested that in order to enable banks to determine the appropriate pricing of loans to small and medium enterprises, the development of a system of proper credit records would be very helpful.

Towards this end, the Credit Information Bureau of India is expected to work out appropriate mechanisms in consultation with the Reserve Bank, Small Industries Development Bank of India and Indian Banks' Association.

The RBI has suggested that banks must obtain information from their large borrowers on their unhedged forex exposures and in turn they can assess the risk of their own exposure to such corporates on an on-going basis.

"A recent study of select banks has revealed that although most banks have adopted policies mandated by their boards, banks often rely on `natural hedge' available with their customers. Information on the total exposure of corporate clients is also not readily available with banks," the central bank said in its report.

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