The Hindu Business Line : `Interest rates are rising as there is no surplus liquidity'

"As for hiking lending rates, it is up to banks to take a call on that. If I fix higher rates than bigger players, customers may say that we are spoiling the relationship with them. Secondly, my salary is not linked with the profit. So why should I invite the displeasure?''

Dr K.C. Chakrabarty, Indian Bank Chairman-cum-Managing Director

Chennai , March 29

The issue of finding sufficient resources to keep the loan growth momentum going is currently occupying the mind share of bankers, the Reserve Bank of India as well as the Ministry of Finance.

Bankers complain of lack of liquidity and have been lobbying for a cut in the cash reserve ratio.

Mr K.C. Chakrabarty, Chairman and Managing Director, Indian Bank, had a slightly different take on the subject. He answered questions with refreshing candour. Excerpts: Is liquidity a problem for the banks?

There is enough liquidity. That is my perception, but a better perception has to come from the RBI. There was earlier the pressure of surplus liquidity. It was difficult to manage the problem of surplus liquidity because of the interest rate differential between India and outside. Interest rates had come down because of this pressure. That surplus liquidity is no longer there and all of a sudden, our rates are also going up.

Where did the surplus liquidity come from?

It came from outside. For example, from NRI deposits. The people who were getting 1 per cent for their dollar deposits moved money here. Since the forward premium on the dollar also came down because of the heavy inflow, we could get the money for one year and give a good return. To sterilise that money, the RBI had to keep issuing securities. They have almost exhausted their stock. The rupee money they release into the system while buying dollars creates extra liquidity. This surplus was pressing rupee interest rates down. That has now disappeared.

Everyday the RBI is pumping in about Rs 20,000 crore through repos. That means somebody needs that money? Isn't that a symptom of liquidity pressure?

It is the RBI's job to keep some liquidity in the system. We have SLR (statutory liquidity ratio) securities against which they lend us money to tide over "frictional liquidity" problems. But that is within manageable limits.

If there is no pressure on liquidity, why are you increasing your deposit rates?

This is not a liquidity issue. This is an interest rate issue. You have to understand that my interest rates have to be attractive enough to attract deposits. Every rate has gone up — repo, reverse repo, and government securities rates that were at 4.96 per cent are now at 7.41 per cent. Similarly three-year bank deposit rates, which were at 5.5 per cent, have risen to 7 per cent.

Will lending rates go up now? Private banks have already increased their lending rates by one percentage point. If you do it, what will be the impact on credit growth?

Let us be clear about the fact that if deposits are growing at 15-16 per cent, credit growth cannot be 25 per cent. For 8 per cent growth in the economy, 5 per cent inflation and the need to provide credit to those credit-worthy borrowers who are not getting it now, about 18 per cent growth in credit is quite sufficient. As for hiking lending rates, it is up to banks to take a call on that.

Are you free to do it?

Theoretically, I am free. But unless the bigger players do it, we have a problem. If I fix higher rates than players like State Bank of India or Bank of Baroda, customers may say that we are spoiling the relationship with them. Secondly, my salary is not linked with my profit. So why should I invite the displeasure?

Accepting your point that bigger players have to do it first, how then are private banks able to increase rates? Many of them are smaller than your bank.

If they don't do it, their profits will be affected. The salaries of the top executives are linked to their profits. Their board will question them if they lose margins.

Is it then a choice between losing business and losing margins?

Look, it is partly a question of losing business. Good corporates may leave our bank if our rates go up in isolation. It is also a question of tackling the feeling in the market that this bank is doing something defiantly. I would be antagonising the market.

How are private banks able to defy the market when public sector banks control about 70 per cent of the market?

I am again telling you — Our system is transparent; so when I raise the lending rate, it is up for everyone. But in the case of private banks, they increase the rate for those who are vulnerable and cannot negotiate, while for a mighty player they may not increase the rate. Or even after increasing the PLR (prime lending rate), they may reduce the spread for influential customers.

As a public institution we have more accountability. We cannot discriminate between customers.

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