The Hindu Business Line : ‘Banks must lend more, borrow in short-term’

Thiruvananthapuram, Dec. 29 Ramping up lending volumes and borrowing in the short-term would be the best option for banks finding difficult to work around the high-cost funds contracted during times of the liquidity crunch.

Speaking to Business Line here, Mr G. Narayanan, Executive Director, Indian Overseas Bank, said that successive rounds of fiscal and monetary intervention have eased concerns over liquidity.

Lowering of the repo and reverse repo rates are forcing down lending rates as banks begin to act in a herd while being saddled with high-cost funds. The banks would do well to learn to live with what Mr Narayanan described as the ‘tolerable mismatch’ in the cost of funds and price of assets till such time as the dust settles on the credit crisis. And it would not take much long for this to happen, as he already sees signs of the cyclical downturn bottoming out. This would hold true for the capital market as well, which is lately engaging the attention of a few ‘global MF players.’

The take-off would be gradual, materialising around the end of the fiscal year. The stimulus packages from the Centre and matching interventions by the Reserve Bank would go to fuel this.

The next round would come within days from each other during the course of the week. The fiscal measures are expected to include further cuts in indirect tax, a package for the export trade and further liberalisation of the external commercial borrowing norms.

As for the monetary component, Mr Narayanan said a 100-basis points reduction in repo and reverse repo rates is more or less a given. But he dismissed fears about the economy slipping into a liquidity trap. In fact, it is likely that another round of easing would take place before March, 2009.

Corporate bonds are entering the most exciting times with the 10-year yield under a squeeze. Asked if this would lead more corporates to tap the market rather than access banks, Mr Narayanan said it need not necessarily be the case. Banks could well act as a supplementary source for working funds.

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‘Banks must lend more, borrow in short-term’