The Hindu Business Line : Interest rates poised for downward correction

Speaking to reporters here today, the ICICI Bank Managing Director and Chief Executive Officer, Mr K. V. Kamath, said “Indian interest rates need to correct for simple reason there is liquidity in the system. Interest rates have been high because of signals that we could have inflationary tendencies.”

He said that deposit rates were likely to be cut and the Reserve Bank of India’s 50 basis points hike in the cash reserve ratio was a cue. “If you look at liquidity flows, I think bankers will start adjusting deposit rates downwards. That would be a signal for correcting lending rates also. Let us take stock (as to) what happens in two to four weeks, then we will see some action,” he said.

Funds flow

Asked whether ICICI Bank would take the lead in cutting deposit rates, Mr Kamath said, “. We will study the impact and then decide. Our effort has been to concentrate on fee income and generating structure which can compensate for the loss (impact due to CRR hike).”

The pressure on liquidity was also on account of mounting foreign fund flows into the country, Mr Kamath said. He expected to foreign funds flow to continue on account of the buoyant economy and corporate earnings growth.

He said “remittances are growing at 33 per cent. I am de-linking interest rates for the moment. Underlying economy is strong. Second quarter results (show) corporate earnings growth is at 25 per cent. This is making India attractive for global investors. If global liquidity remains undisturbed, we will continue to have flows. As long as fundamentals are strong, we will continue to have flows.”

Sharp decline

Consumer credit growth had plummeted to five to ten per cent during the current financial year against peak of 30 to 40 per cent over the last five years. With no softening of interest rate, credit offtake in the banking sector had declined sharply for the first six months of current fiscal, said Mr Kamath. “We see real slackness in consumer credit offtake due to higher interest rate.”

The banking sector witnessed about 30 per cent growth in consumer credit business in the last fiscal (2006-07), with the cumulative offtake at Rs 2 to 2.5 lakh crore. If the same growth had continued this fiscal, it would have been a huge driver for credit growth in the first six months.

Referring to the weak credit offtake during the first half (April-September), Mr Kamath said corporate credit flow also remained subdued due to various factors.

“As corporate India has been flush with cash flows, there has been a slight dip in bank lending. Profitable firms are comfortable to draw from their cash flows for investment than borrowing from banks. Though it is not so good news for us, it is certainly good news for the country,” he pointed out.

Major initiative

ICICI Bank has taken a major initiative to counter the slackness in corporate and consumer credit offtake by moving into international banking and hard-selling corporate/project finance business. “We have activated our corporate finance business and seen strong growth during the first two quarters after going international. We have ways to balance our credit portfolio to sustain growth,” Mr Kamath said.

He said Indian banks would have collectively taken a hit of 1.5 per cent on interest income due to increase in cash reserve ratio (CRR) from six per cent to 7.5 per cent this year.

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