‘NPA situation is not alarming but disturbing’

RBI Governor D.Subbarao once again chose to stand firm and hold the repo rate in his October monetary policy review. There has been mounting pressure both from markets and from the Government to cut rates and stir growth. Yet, inflation has remained uncomfortably high and the RBI has chosen to not dilute its anti-inflationary stance. Why did you not make any statement on bank licenses?

The reason we did not make any reference was because there was no change in the situation. In order to allow corporate into the banking area, we need the power to supersede the board, power to approve shareholding beyond 5 per cent, power to approve voting rights, consolidated supervision of the bank, etc. All this requires amendment of the Banking Regulation Act, which is pending before Parliament.

When you don’t cut rates, isn’t the common man affected?

We are concerned about the common man. We want to make sure that he has access to credit at reasonable rates of interest. We are also concerned that there should be low and stable inflation so that he is protected. The RBI’s policy is aimed at making life better for the common man.

Remember that we have to look at both lending rates and deposit rates. When I travel across the country, people tell me that deposit rates are not remunerative enough. We need to make sure that they get a real positive return on their deposits.

Will the CRR cut result in banks reducing rates?

That is our expectation. At the current repo rate there is a demand for credit. And it should flow into productive sectors. The liquidity constraints should not inhibit flow of credit. While our repo rate reflects our anti-inflationary stance, the demand for credit at the current interest rate must translate into lending rate. That is the objective behind the CRR cut.

You said earlier today that the non-performing assets (NPAs) situation is not alarming but disturbing..

Let me explain. The NPA situation is not alarming because the banking system is strong. The Capital adequacy ratio is at 13.6% at the aggregate level – and that is strong enough to withstand stresses even if NPAs were to increase substantially. That is why I said it is not alarming. But I said it is disturbing because the NPAs are increasing. In March the NPAs were at 2.9 per cent of assets. In June they had risen to 3.25 pre cent of gross assets. Until the economy improves, there is a likelihood of NPAs increasing.

Is the government doing enough? You have said that you may ease monetary policy ‘down the line’..

I think the Government has done quite a lot in the last few months including the politically difficult but necessary hikes in diesel prices. They have also taken measures to improve investment especially foreign investment. From what I hear, there are a couple of operational problems at the State and district administration levels. These are areas that the government needs to focus on to help ease supply constraints.

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