Mumbai: The Reserve Bank of India (RBI) expects the banks to slash the lending rates further over a period of time but non-performing loans could rise in a slowing economy, a top RBI official said on Monday.
Anand Sinha, an executive director at the RBI, said the RBI would continue to maintain ample liquidity in the banking system using conventional and unconventional tools.
He said lending rates have come down in recent weeks. “Over a period of time we expect the lending rates to come down,” he added.
At its quarterly monetary policy review in January, the RBI kept its key rates steady and said banks had significant room for cutting lending and deposit rates.
Sinha said the central bank will maintain the overnight cash rate between the reverse repo rate, through which it absorbs surplus cash from the banking system, and the repo rate, which infuses cash.
The apex bank has eased its policy aggressively since mid-October. The repo rate has been cut by 350 basis points to 5.5%, while banks’ cash reserve requirements have been reduced by 400 basis points to 5%.
Prime lending rates of many state-run banks range between 12.5% and 14%, while that of private sector banks were higher.
Asia’s third largest economy is estimated to have expanded by 7.1% in 2008-09, compared with 9.0% in the previous year and its slowest growth in six years, as demand shrank due to the knock-on effects of the global financial crisis, data showed on Monday.
The RBI estimated non-performing loans were 2.3% of banks’ gross advances in 2007-08 but Morgan Stanley, in a recent note, said they would rise to 6.1% by 2010-11.
“In a downturn, yes, NPA (non-performing assets) levels can be expected to rise but, let us see,” said Sinha.
Sinha said its recent measures to allow banks to restructure their loans were not aimed at just reducing non-performing loans but to provide timely assistance to economically viable units.
Last week, the RBI said banks could restructure assets, which had turned bad between September 2008 and January 2009, by 31 March.