The Reserve Bank of India (RBI) Governor on Tuesday instituted a review of the system of benchmark prime lending rates, which have turned irrelevant and non-transparent. In an interview with Rajendra Palande, Subbarao went a step further and said when the new government is formed, the entire interest rate structure in India, including interest rate on small savings schemes, will need to be evaluated.
Would there be a cut in interest rates on government savings schemes (which currently are around 8 per cent)?
I am not ruling out the cut in savings rates. But we will have to wait till the new government comes in. There is a need for having a re-look at the entire interest rate architecture. When the new government takes office, they will need to look at the interest rate structure, including small savings and the BPLR.
RBI has been urging banks to lend but why is there a slower growth in credit?
We have discussed with banks this claim that supply of credit is a problem. Credit demand from oil and fertilizer companies has gone down and also working capital requirements have gone down because of prices of commodities. Banks are willing to lend but people are waiting for prices to adjust first. So, I do agree with the argument that credit demand has declined for banks to substantially increase lending. But it is always a question of supply and demand.
Won’t large restructuring loans of loans lead to piling up of NPAs later?
Reserve bank institutionally is very sensitive to maintaining balance between credit expansion and credit quality. Even as we urge banks to increase lending, we also urge them to maintain credit quality. I believe the regulatory forbearance that we are allowing by way of restructuring in a downturn is as a responsibility of the monetary authority and the government. But there is a balance to be struck. Banks need to judge which ones are inherently viable units that should be given the benefits of restructuring and which ones are inherently unviable that should not be propped up by restructuring.
Is the worst is over?
There are some tentative signs of revival like IIP numbers. But I still personally believe that though many people say India will recover before the world recovers, I believe that a robust recovery in India is not possible till the world recovers.