The Hindu Business Line : Raising the rate

SEEMINGLY ANY RUSE is good enough for banks to push up lending rates with the latest being the rather sharp rise in yields on government securities. Bankers are keen to mark up the price of housing loans by 25-50 basis points over the current 7.5-8.5 per cent to track the market yields on 10-year government paper crawling up to 7 per cent and expected to move up further. The move might have carried conviction if banks were tapping the market to raise funds for on-lending, but their general practice is to recycle cheap retail deposits into loans. With the average cost of deposits still around 5 per cent for most banks, an interest rate hike will only have cynical effect and hurt borrowers.

Over the past month bankers have been predicting higher yields on the back of the heavy government borrowings scheduled for the current year, side-stepping the over Rs 30,000-crore placed by them in reverse repos with the Reserve Bank of India to earn 4.75 per cent. Apparently there is enough liquidity in the system. A second factor being touted is the frequent rise in the Fed rates despite their being lower than yields in Indian markets. There are reports of banks charging a tad above their sub-PLR (prime lending rate) of 8-8.5 per cent for top class corporates to make up for thin trading profits. Over the last two years the PLR of around 10.25 per cent has become redundant except for the farm and small-scale sectors. Going by the current whining over pressures on profit margins, most banks should have shown lower profits; but that is not the case. All banks have reported reasonably good profits over the last three years, and the trend may not change in 2004-05. With strong corporates running their own treasuries, banks are forced to place funds in low-yield corporate paper and there is an unhealthy scramble among banks to pick up corporate accounts. The Inter-Institutional Group for private power projects has been quietly negotiating financial closures at 8.5-10 per cent. Bankers are finding it hard to reconcile themselves to the prospect of building loan books amid competitive pressures.

The rate of growth in non-food credit in recent times has been the highest since 1996-97 going by the Economic Survey 2004-05 and a 7 per cent rise in GDP this year should keep bankers busy, if they intend to be. Bankers looking down the calendar to October predict a rise in open market yields not seeing any let up in crude oil prices which will nudge domestic inflation rates. New Delhi cannot for long bleed public sector oil companies for otherwise banks will have to do a reluctant bail-out. But the plot need not pan out that way if a good monsoon comes up with a bumper crop. New Delhi and the RBI do believe (at least privately) that bankers are not playing fair. Net Interest Income (annualised) of banks as a proportion of total assets improved to 3.1 per cent in the second quarter of 2004-05 against 2.9 per cent in the same period last year. Despite the initiatives taken by the RBI the lending rates of banks have exhibited considerable downward rigidity, contends the Economic Survey and it is not going on a tangent.

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