The Hindu Business Line : Making money dearer

ICICI BANK HAS pushed up its Benchmark Prime Lending Rate (BPLR) by 50 basis points to 11.75 per cent and SBI, the major domo, is threatening to follow suit. With not enough funds going round, banks have been marking up deposit rates with a distinct bias in favour of high net worth individuals. ICICI Bank recently picked up new equity money amounting to around Rs 8,000 crore and so ought to have been more comfortably placed to warrant any suggestion of tighter liquidity. Most banks seem to be doing fine, going by their third-quarter results, and it is hard to back their whine over shrinking margins. Also, deposit growth is not as slack as it is made out to be with aggregate deposits rising by 14.1 per cent (Rs 239,442 crore) in 2005-06 (up to January 6, 2006) as against a rise of 10 per cent (Rs 150,094 crore) in the same period of the previous year. In any case, it is notable that the public sector banks, which dominate the banking scene, should be staying their hand if there is indeed any industry-wide pressure on the margins. Are they being held back by the Finance Ministry to facilitate the borrowing programme of the Centre and States?

With the benchmark rate a relic, going by the admission of the RBI and banks, one does not see any particular logic in banks getting desperate over re-fixing the rate. Most loans, at least for corporates, are priced at between 8 per cent and 9 per cent and banks favour quality corporates by lending below the band. Dollar inflows are holding strong and the RBI has to choose between absorbing the dollars (and releasing rupee funds into the system) and letting go for the rupee to appreciate. Little is being said over the desire of banks to protect spreads at around 3 percentage points at a time when NPAs are down and the loan books are growing. To help the economy grow at the current pace, banks need not indulge in marking up the BPLR and the RBI has specifically told the Indian Banks' Association (IBA) to "review the BPLR system afresh and issue transparent guidelines for appropriate pricing of credit."

Credit pricing today is largely an opaque exercise and banks have been able to get the rural and services sectors to cross-subsidise corporates. The RBI admits to the practice when it says: "There is a public perception that there is underpricing of credit for corporates while there could be overpricing of lending to agriculture and small and medium enterprises." Banks are working on a strategy to have floor rates for various sectors. Why should banks join up to fix floor rates and why should they vary across sectors? Should the floor rate for funds to corporates be lower or higher than that for the farm sector and why? If banking is all about fair pricing of money, it is not sectors but the quality of borrowers that is critical, as there is nothing else to set apart a healthy loan book of a farmer from a corporate. For banks this is as good a time as any to link interest rates on funds to the credit quality of the borrower. They need to clean up their pricing act ahead of trying to garner support for making money dearer.

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