Lending rates sticky, not in tune with deposit rates: Survey

The '03-04 Economic Survey said the Benchmark PLR had not benefited all borrowers, prompting RBI to advise banks to align the pricing of credit.

Warning that hardening global oil and non-oil prices and capital inflows may affect monetary conditions this year, the Economic Survey on Wednesday regretted lending rates in India have remained "sticky" and not fallen in line with deposit rates.

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The Survey for 2003-04, presented in Parliament, said the Benchmark Prime Lending Rate had not benefited all borrowers, prompting RBI to advise banks to align the pricing of credit for improved fund flow to industrial sector.

On the interest rates, which had been softening in the recent years, the survey voiced concern over the "downward rigidity" in the lending rates which have not fallen as much as deposit rates.

Noting that RBI had advised banks for aligning pricing of credit to risk, the Survey said: "Measures already taken and being taken by RBI are expected to further ease rigidities in lending rates, which will help to strengthen and sustain the current revival in the industrial sector."

Finding a wide gap between lending and deposit rates, it said interest spread of the commercial banks had witnessed an increase during 2001-02 and the subsequent year.

Lamenting that lending rates had not benefited small borrowers while large top-rated borrowers could get cheaper funds than the market rates (sub-PLR), it said RBI had put in place the benchmark PLR, which is 0.25-1.0 per cent lower than the PLR, but it only "somewhat addressed the problem."

The Survey said the sterilisation, through the open sale of Government securities, involved "quasi-fiscal costs" in terms of difference between the domestic interest rates and return on foreign exchange reserves.

"Sterilisation, if it exerts upward pressure on interest rates, could result in attracting more foreign currency inflows, thus necessitating more intervention by the monetary authority," it warned.

In this context, the Survey stressed on the need for long term policy initiatives for "improving the country's absorptive capacity" of such inflows.

It noted that private capital flows, which have increased "significantly", formed the bulk of the long-term capital flows.

In 2003-04, forex assets of RBI rose by Rs 1,41,428 crore compared to Rs 82,090 crore in 2002-03, resulting in excess liquidity.

Under sterilisation, effective from April 2004, Government issued Treasury Bills or dated-securities under the market stabilisation scheme besides the normal borrowing requirements to absorb excess liquidity, it said, adding these "indistinguishable" instruments were eligible for the purposes of SLR and repo.

These securities, under the scheme, were matched by an equivalent cash balance held by the Government, offsetting the monetary impact of accretion to the RBI's net foreign assets.