Time to cut lending rates

The RBI continued its monetary easing drive by cutting repo rates (at which RBI lends short term to banks) by 50 basis points to 7.5%, Cash Reserve Ratio (CRR) (the portion of deposits banks have to keep with the RBI) by 100 basis points to 5.5%, and the Staturoty Liquidity Ratio (SLR) (the portion of deposits to be invested in government securities) by 100 basis points to 24%, all of which are expected to release Rs 1,80,000 Cr in additional funds to the markets.



The monetary easing efforts of the past few weeks, which has released atleast Rs 3,00,000 Cr ($50bn) into the liquidity strapped markets, ought to de-clog the liquidity markets. But these measures appear to have had limited efect so far. The inter-bank call money rates reached as high at 21% last week.

It would appear natural to expect banks to lower their lending rates in the aftermath of such dramatic loosening of monetary policy by the Central Bank. However, despite these singificant rate cuts, the Indian banks have been extremely reluctant to pass on the benefits to the retail and commercial borrowers. This reluctance appears all the more unreasonable given the clear signs given by the RBI and the global economic environment that we are in for a protracted period of lower interest rates. Some of the well respected names in the private sector banking in India have even arrogated themselves to the role of RBI Governor and expressed fears that lowering rates would stoke inflationary pressures!

Bankers should realise that their blatant greed and refusal to play by the rules of the game can create untold damage to the economy, especially at a time when it needs support. Afterall, banks, especially in countries like India, are nothing more than a means of servicing the real economy. At 12.75-13.25%, the Prime Lending Rates (PLRs) in India are among the highest in India, and with core inflation falling to around 7%, even real interest rates are among the highest.

These high rates have choked off credit to the bank finance dependent small and medium enterprises in the country, and will adversely affect the cost of operations in critical sectors like construction and infrastructure. It will also hurt interest rate dependent sectors like consumer durables and housing. In many ways, the high interet rates may be the single biggest cost factor affecting the competitiveness of corporate India.