The Hindu Business Line : Hardening rates are here to stay

What they say
The banking system will see an upward bias on interest rates and tightening of liquidity: V. Vaidyanathan, Executive Director, ICICI Bank
Banks will have to depend on deposit route rather than the repo route for funding credit growth: Mr V.P. Shetty, CMD, IDBI .
It is encouraging that the RBI has not increased risk weights or provisioning requirements for housing loans: Mr Keki Mistry, MD, HDFC

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Feb. 1, The RBI's mark-up in the repo rate by 25 basis points to 7.50 per cent has reaffirmed the view that hardening interest rates are here to stay. Bank chiefs contend an upward bias in interest rates will remain.

"The banking system as a whole will see an upward bias on interest rates and tightening of liquidity. In the last one month, one-month interest rates on fixed deposits have gone up by over 100 basis points and the changes in this credit policy will catalyse the process of hardening of interest rates," said Mr V. Vaidyanathan, Executive Director, ICICI Bank.

"The banking industry has been believing that strong demand factors will sustain credit growth despite an increase in interest rates. But the point has been reached where the incremental credit demand will be impacted," he added.

According to Mr V.P. Shetty, Chairman and Managing Director, IDBI Ltd, banks would be required to depend on their own balance sheet (deposit route) rather than on RBI balance sheet (repo route) for funding credit growth. "As an effect, while short-term rates will remain high, even long-term rates might move higher. The increase in provisioning requirement will make banks to increase the cost of such credit for the borrowers," he added.

Bankers emphasise loans to sectors where provisioning has inched up from one to two per cent will take a beating. "There is likely to be an increase in interest rates on loans to the real estate, capital market and retail as the higher effective costs will be passed on to the borrower. Credit growth is likely to slow down to 20-23 per cent this year," said Mr M.B.N. Rao, CMD, Canara Bank.

Mr Romesh Sobti, Country Executive, India & Head Sub Continent - UAE, ABN Amro Bank agrees. "The hike in provisioning requirements by a percentage point in certain categories is significant in terms of additional capital requirements. Given this, banks are likely to push up loan rates in these categories."

Housing finance companies reacted with relief that home loans were left out of the higher provisioning requirement. "It is encouraging that the RBI has not increased risk weights or provisioning requirements for housing loans. The demand for retail housing loans continues to be genuine and not speculative in nature," said Mr Keki Mistry, MD, HDFC Ltd.

Concern has also been voiced from some quarters over the higher provisioning. "Banks must have flexibility and should not be led to lend. Given the regulator's long standing concern on real estate, one option could be to work out a system whereby the real estate portfolio of banks is marked to the market," said Dr Haseeb Drabu, Chairman, Jammu & Kashmir Bank.

Some bankers said the pressure on interest rates would only be in the near term. "The hike in repo is a signal of a short-term movement and it is not going to affect the interest rates in the medium term. Banks are unlikely to face any liquidity crunch and lending rates will not be revised," said Mr T.S. Narayanasami, CMD, Indian Overseas Bank.

While the announcements are more or less along expected lines with the Reserve Bank not touching the CRR or the reverse repo rate, the measures clearly indicate that the regulator is aiming to contain inflation, the Chairman of the City Union Bank, Mr S. Balasubramanian, has said. "The demand for credit is already there and when liquidity becomes tight, the possibility of an increase in interest rate in the near term cannot be ruled out."

Mr P.T. Kuppuswamy, Chairman, Karur Vysya Bank, said the policy reflected the regulator's preference in reinforcing price stability and containing inflation. "The hike in the repo rate by 25 basis points rather than in the reverse repo rate is suggestive of expected tightness in liquidity and inflation containment in the quarter to come," he added.

The CMD of Corporation Bank, Mr B. Sambamurthy, has termed the Credit Policy review as a "wake-up call for credit quality." "Normally, capital adequacy is for unexpected losses. The RBI probably wants us to build cushions to take care of any unlikely event of unexpected losses."

The Chairman and CEO of Karnataka Bank, Mr Ananthakrishna, said that the move to hike repo rates by 0.25 per cent was targeted at inflation.

According to sources with Srei Infrastructure Finance, the central bank had in the past signalled its stance on deposit collection, making it clear that it did not wish to encourage too much of this activity to go on in an unbridled manner. The position now seems to be changing, at least in a limited way, it is felt.

A senior functionary at Peerless General Finance and Investment Co noted that the latest credit policy will require the financial services industry to turn more cautious, although it may well encourage larger players, including outfits with overseas antecedents, to explore the possibility of doing business in the Indian financial services sector.

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