The Hindu Business Line : Wrong direction

The optimal way to lower rates is through the mechanisms of the RBI just as the best catalyst for sparking off credit growth is revival of spending; directed deposits will do neither.

For over a month, the Finance Ministry, in tandem with the Reserve Bank of India, has been engaged in easing liquidity and reducing the price of credit. Those efforts appear to have paid dividends. Over the past week, following the Finance Minister, Mr P. Chidambaram’s meeting with bank chiefs in New Delhi, public sector banks have begun reducing lending rates; against official expectations of a quarter percentage point drop, on average, rates have fallen by 0.75 poi nt. While moral suasion by North Block may have worked in large part, the signal from the RBI for a softer monetary policy evident from higher liquidity releases through cuts in the Cash Reserve Ratio and repo rates, would have encouraged banks to follow suit. But the North Block’s latest efforts in this direction appear misguided and arbitrary.

Cash-rich public sector enterprises have been advised not to seek competitive bids from banks for bulk deposits (more than Rs 1 crore) but to be content with card rates; usually competitive rates can rise two percentage points higher. In a related advisory that is even more arbitrary, the Finance Minister has asked the PSUs to park at least 60 per cent of their surplus funds with public sector banks. This is not the fist time that New Delhi has issued such instructions. North Block has issued them again not simply because they were ignored but because the times require a reduction in the cost of bank funds to enable softer lending rates. But just how efficient is North Block’s method of ensuring cheaper funds for credit when it enriches public sector banks at the cost of the PSUs that will stand to lose Rs 3,000 to 4,000 crore from this diktat? Then again, assuming that bulk deposit rates drop, what is the guarantee that the banks will lend this money? With all the liquidity injected into the banking system — Rs 2 lakh crore through RBI cuts — banks have shown a preference for government paper with as much as Rs 71,226 crore parked in G-Secs in the fortnight ending October 24 compared to Rs. 19,879 crore in the fortnight ending September 12.

The problem North Block must confront is the lack of confidence among lenders about sectors that were once considered profitable to lend to. Risk aversion is spreading to borrowers who are delaying decisions because of uncertainties in the economy and the heightened risks of investing. The high cost of money has not helped. Yet, the most optimal way to get the interest rates down is through the mechanisms that RBI has at its disposal just as the most effective catalyst for sparking off credit growth is the revival of spending; directed deposits, like directed lending in earlier times, will do neither.

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Public sector cos not following norms on bulk deposits
Reserve Bank cuts repo rate to ease credit squeeze

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