New Delhi: Finance minister P. Chidambaram on Wednesday urged heads of India’s public sector banks, who control more than 70% of banking assets in the country, to take steps to lower lending rates which are at a five-year high, to help keep the economy growing and reduce the cost of doing business.
The country’s economy expanded by 9.4% last year and is expected to grow at over 8% this year, but the Reserve Bank of India (RBI) has increased the key lending rate twice in 2007, taking it to 7.75%, to rein in aggressive lending. Some bankers and finance ministry officials said the prevailing lending rates are likely to remain for now.
RBI raised the cash reserve ratio (or the balance banks need to maintain with it) by 50 basis points to 7% from 4 August and removed the ceiling on the amount banks can park with it.
That helps RBI tighten liquidity in the market. “RBI is obviously concerned with liquidity; that is a legitimate concern,” Chidambaram said. The measures announced on Tuesday would drain the system of about Rs15,000 crore, he added.
Some bankers, however, said during the meeting that recent measures to drain liquidity out of the system could eventually dampen their ability to offer lower rates as they have to keep more money in their reserves. “The net impact (of monetary measures to suck out liquidity) will be immediately felt on net interest margin (of banks)... this is something the system has to bear,” Chidambaram told reporters after the meeting.
The net interest margin, which is a measure of a bank’s returns in its core business of borrowing and lending capital, of 21 of the 28 public sector banks was more than 3% at the end of March 2007.
Seventeen banks had a net interest margin exceeding 3% on 31 March. During the same period, the proportion of aggregate bad loans (gross non-performing assets) to total assets declined to 2.65% from 7.80%.
The financial performance of public sector banks as a group has improved over the last three years, Chidambaram said, and added that it is possible for public sector banks to absorb a small hit on their balance sheet.
The growth in credit of the banking system is expected to be about 24% in the current financial year, said Chidambaram. Banks expect to collect 20% more in deposits in the same period.