Mumbai: Top executives of large banks told the Reserve Bank of India (RBI) brass on Wednesday that although bad debts are manageable now, they could grow sooner than later and there’s not much room left for lower loan rates.
Chief executives of large public, private and foreign banks met RBI governor D. Subbarao and three deputy governors at the central bank’s headquarters in Mumbai ahead of the central bank’s annual policy review slated to be unveiled on 21 April.
RBI holds such meetings in the run-up to its annual and quarterly monetary policies through the year to hear the bankers’ views on critical issues but does not hint at likely policy announcements.
Signalling policy: RBI governor D. Subbarao has repeatedly said banks are not passing on cuts in interest rates to customers. Abhijit Bhatlekar / Mint
Bank of India chairman and managing director T.S. Narayanasami, Punjab National Bank’s K.C. Chakrabarty, Bank of Baroda’s M.D. Mallya, Canara Bank’s A.C. Mahajan, Union Bank’s M.V. Nair, Axis Bank Ltd’s P.J. Nayak, Standard Chartered Bank’s Neeraj Swarup and Citibank NA’s Mark Robinson attended the meeting.
Public sector bankers said it is difficult for them to lower rates further as they have already lowered their prime lending rates (PLR), or the rate at which they lend to their best customers, following the central bank’s policy signals.
One of them even suggested that banks should not be allowed to lend below their PLR. Banks are supposed to lend to their best borrowers at PLR but they keep their PLR high and lend to their best borrowers at lower rates. If RBI bans lending at below PLR, banks will be forced to bring it down.
After the meeting, Narayanasami, who is also the chairman of Indian Banks’ Association, the apex bankers lobby in the country, told reporters that there is not much room for lending rates to come down immediately but lower rates are in the interest of lenders themselves.
“It is in our own interest to bring down our lending rates so that our asset portfolios do not get impaired. We are making every endeavour to see that cost of funds are brought down,” he said after the meeting.
Public sector banks have lowered their PLR to 11.5%-12% from 14% within five months following RBI’s policy signals. Since October, RBI has brought down its policy rate to 3.5% from 9%.
Private and foreign banks are yet to respond in a similar fashion. Last week, Axis Bank lowered its PLR by 50 basis points to 15.25%.
India’s largest private sector lender ICICI Bank Ltd’s benchmark advance rate is as high as 16.75%. One basis point is one-hundredth of a percentage point.
The RBI governor has repeatedly said that banks are not passing on the interest rate cuts to their customers.
According to Narayanasami and Chakrabarty of Punjab National Bank, unless costs of deposits comes down, banks cannot lower lending rates.
There might not be much room left for banks to lower deposit rates either. They are offering now 8-8.5% interest on one-year deposits and will find it difficult to bring the rates down drastically as various small savings schemes of the central government offer 8% interest.
The biggest concern for the bankers is the possibility of rising debt against the backdrop of a slowing economy. Banks are actively restructuring their loans to troubled companies and are allowed to do so up to 30 June. If the economic slowdown continues, the restructured assets will turn bad and banks will be required to set aside money to take care of that.
This will hit their profitability. Analysts expect gross non-performing assets as a percentage of loans for the banking industry to jump as much as 5% by fiscal 2011 from the current 2.3%.
Bankers also told the governor that the credit demand from the Indian firms have fallen. In the first 11 months of fiscal 2009, bank credit grew by about 18% and it will drop further, bankers said.
Reuters contributed to this story.