The Hindu Business Line : Why the banks won’t lend even if they lower interest rates

New Delhi, April 21 You can take a horse to water but can you make it drink? This is the question that the Reserve Bank of India has failed to answer in its Annual Policy Statement for 2009-10.

In order to force banks to lend to entities other than itself, the RBI has reduced the reverse repo rate by 25 basis points to 3.25 per cent from 3.75 per cent. This will make it less profitable for banks to lend to the RBI. This, in turn, the RBI hopes, will force them to lend to private sector customers.

The credit-deposit ratio has declined sharply from 74 to 71 per cent in four months. Says Prof Suresh Tendulkar, Chairman of the Prime Minister’s Economic Advisory Council, “How will they stay in business if they don’t lend?”

SMES bear the brunt

The brunt of this slowdown has been borne by the small and medium enterprises, says a former advisor to the former Finance Minister, Mr P. Chidambaram. This is what the RBI also said today.

A senior official of State Bank of India confirms this. He says that these units are not much affected by small changes in the interest rate. “It is a steady supply that they need and that has become a problem.”

Bankers have been explaining the risk perception by managers at the branch level. Says another public sector banker, “If a branch manager decides not to take a decision but kicks the file upwards to his boss then even if the loan comes through eventually the delay is very costly for the SMEs”.

Fear of vigilance enquiry

A part of the problem is also the fear amongst middle and upper-middle level managers that they will not be promoted if a loan they sanctioned goes bad. The fear of vigilance enquiries is also ever-present. During a downturn, therefore, the pre-disposition not to take risk becomes even more pronounced.

Many small and medium units seeking loans are already deep in debt. Many of them, says a banker from a very large public sector bank, are “entrepreneurs” who have taken loans from state financial institutions because they knew some politician or bureaucrat.

“Their balance sheets do not warrant any further loans as these businesses have become intrinsically unviable.”

There has also been sharp dip in loans to small and medium exporters whose markets in the US have dried up almost completely. Reviving credit to them is going to take time.

Related Stories:
‘Banks should lend more to commercial institutions’
‘Banks should pump more money into the economy’
‘No matching response from banks to RBI signals’
Banks prefer ‘safe’ customers for personal loans

More Stories on : Banking | Credit Market | SSI | Credit Policy

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Northwest, Central India reel under heat wave

RBI eases FCCB buyback norms further

‘Market share of Indian BPOs to double by 2010’

Wipro buys Nokia’s mobile TV unit

20 Kingfisher pilots quit

Reliance Power achieves financial closure for Sasan project

Allied Digital Services (Rs 269.75): Buy

Day Trading Guide

RBI cuts repo rates

Why the banks won’t lend even if they lower interest rates

‘No prior approval needed to set up offsite ATMs’

Titan has the ‘fibre’ to counter cheap imports

RBI rate cut comes as a surprise to marketmen