The Hindu Business Line : NPA recovery will benefit all: Mid-year review

FASTER recovery of non-performing assets (NPAs) and improved efficiency in banking system could help banks in offering remunerative rates for savers and more attractive rates to borrowers, the Government has said in its mid-year review of the economy.

The review, which was tabled in the Lok Sabha on Friday by the Finance Minister, Mr P. Chidambaram, has also noted that while real rates of interest in the country continued to be benign and moderate, interest rate spreads continued to be high because of slow recovery of NPAs and inefficiencies of the banking system.

It also noted that the rapid expansion in demand for bank credit could be met by the banking sector without any undue pressure on the interest rate regime because of the adequate liquidity in the system, which was facilitated by lower bank investments in government and approved securities.

"Interest rates have come down over the last several years and if we are able to contain inflation, interest rates will continue to decline", Mr Chidambaram said in the Lok Sabha.

Later, he told reporters that the Government favoured lower interest rates. "Of course, who does not favour lower interest rates, but rates should reflect market conditions and inflationary expectations", he said when asked if he favoured lower interest rates.

Crude prices: On international crude oil prices, the mid-year review has said that there are no indications of "fundamental macro-economic imbalances" in spite of a rapid rise in international crude oil prices.

The review has, however, expressed concern over the near stagnancy of overall crude oil production during the Tenth Plan period.

"Given the present level of discoveries, while natural gas production is expected to show a marked improvement from 2008-09, there is very little good news on the crude oil front so far", the review said.

The main reasons for the stagnation in overall crude oil production, according to the mid-year review, are the natural decline in output in the ageing oil fields, very few oil discoveries by ONGC and OIL and isolated and marginal fields of ONGC and OIL.

"The stagnation is harmful particularly because of the time-lag of 7-8 years involved in the development and exploitation of recent gas discoveries by the private and public joint-venture companies", the review noted.

GDP growth: As regards the overall gross domestic product (GDP) growth, the mid-year review has projected an overall growth of over 7 per cent for the economy in 2005-06.

The review, which contains reflections on economic prospects and policy issues, has also said that it should be possible to contain the annual average inflation to below 5-5.5 per cent in 2005-06 on the back of appropriate monetary and fiscal measures.

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