‘Can the Reserve Bank of India stand up to the Finance Minister,’ was the question raised recently in the media. This is a misleading question. The RBI is expected to provide expert advice to the Government, in compliance with the provisions of the RBI Act, 1934. Acceptance or rejection of such advice is the latter’s prerogative.
That the biggies among the businessmen “like flat, placid wickets and, if it is not asking for too much, underarm bowling, preferably with tennis ball,” was a further point raised in the article referred to. This is altogether a different proposition and the umpire has to step in and stand his ground! Interest rates and the method of liquidity management appear to be the issues of contention. Can we follow the developed countries and relax monetary controls and lower interest rates when the inflation figure for a month falls marginally? This may only help the Sensex go up temporarily.
It may not be out of context to refer to the contents of three articles. Highlighting the “Rising cash hoard at India Inc”, the author has said that the absolute amount of cash and liquid investments that companies are holding is 63 per cent higher than March 2009 levels. Another report says that the cash and bank balances of five corporate bodies worked out to Rs 79,652 crore, quoting CMIE data. Yet another analysis says cash balances of CNX-500 companies have touched Rs 3,00,000 crore and are growing at 22 per cent.
High cash levels
Have these companies been able to build up such relatively high levels of cash and liquid assets on account of their getting credit at 2-3 per cent below BPLR and improve working results through treasury operations?
Is this the role of bank credit? Can India Inc not re-deploy cash balances in the core sector instead of resorting to treasury operations? Has the base rate system made it difficult to obtain bank credit at lower interest rates?
If the uncertainties in policy matters are removed, investment opportunities would be profitably used by the corporate world to enhance shareholder value. Interest rates may perhaps not be the predominant factor. It can be seen from the Trend and Progress of Banking in India 2010-11 that the return on assets (RoA) of Indian banks compare favourably with those of some of the advanced economies during 2007-11.
The capital to risk-weighted assets ratio of Indian banks is not far behind those in advanced economies. The RoA and Return on Equity have improved. The net interest margin (NIM) also has increased from 2.17 to 2.92 during the period 2009-10 and 2010-11
However, the Report has observed that “a higher NIM contributes to profitability, implies higher cost of financial intermediation in the economy, which is considered a sign of inefficiency.” The Report has indicated that there is a need to bring down NIM to improve the efficiency of financial intermediation along with increasing the non-interest income to maintain profitability”.
In fact, the RBI Governor has been repeatedly exhorting bankers to reduce the NIM.
Systemic imbalance
If despite 40-45 per cent of the credit to large-scale verticals providing a yield of around 8 per cent yield, the NIM is at a high level of around 3 per cent, it perhaps indicates the high level of cross-subsidisation of large borrowers by the borrowers in the educational, housing, vehicle and consumer durables segments, providing a yield of around 14 per cent. Efforts have to be made to remove this imbalance in the system.
Because of a marginal fall in inflation, reduction of interest to “give growth a chance” may not be a well-advised move at this stage. It has been brought out by different analysts that India Inc holds huge cash and bank balances. Its improved profitability may be attributed to treasury operations and staying away from investing in core business because of uncertainties — or policy paralysis. The need of the hour is to tackle inflation by increasing output.
It is also crucial issue that banks revisit the way they charge interest to different segments of borrowers and try bring about uniformity with one another in working out the base rate, as recommended by the Working Group headed by Dr Deepak Mohanty. This will bring in greater transparency in the rate of interest charged to different borrowers.
It is imperative to take steps to reduce the NIM from the 2010-11 level of 2.97 per cent after studying the yield structure of different segments of borrowers and reducing interest on loans for education, housing, vehicles, and consumer durables, which affect the common man. It would be beneficial to all stakeholders good to evolve a broad, long-term policy on the matter after due deliberations between the Government and the RBI.
(The author is a retired Chief General Manager of Reserve Bank of India.)
Keywords: Reserve Bank of India, stand up to the Finance Minister, developed countries, relax monetary controls, lower interest rates, inflation figure for a month falls marginally
Comments:
As space is limited, I will comment only on NIM. The net interest margins enjoyed by some banks are much higher than the average deposit interest rates in certain countries from where we cut and paste policy formulations. But this is not peculiar to banks. Margins enjoyed by industries and service sectors are also not amenable to any discipline. The huge margins of profit enjoyed by Pharmaceutical industry as also IT and electronic sectors affect the common man. The scenario is worse when it comes to agriculture, agricultural produce and processing industry.Government should state the policy about costs and margins as also prices and wages. More often those responsible for policy formulation take shelter under technical terms like inflation, impact of recession abroad and so on. If corporates are sitting on huge cash piles or the net-worth and number of billionaires are rising when overall standard of living is going down and hunger and poverty are increasing, it is time to wake up.
The article reads well and needs an indpth analysis to assess how banks loan portfolios are conducted.The banks charge very high rate of interest on retail loans and lower rates for corporate borrowers are known to all but the authorities cannot do anything as officially,rates are market driven and banks have freedom to charge any rate of interest depending on their business interestswith the clients.There is cross subsidisation and corporate clients have the bargaining capacity and are able to dictate terms to banks. Optimisation of profit using others funds is what the corporates are doing and this is what is perhaps brought out in the article. Banks have a tendency to please corporate borrowers by offering lower interest rates and at the same time they do not want to bring down the NIM and with the result small borrowers bear the brunt.The loss on account ofNPAs is also borne by the other stake holders of banks although big Corporates account for major chunk of NPAS.
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