New Delhi: India is likely to see loan growth of 24% this fiscal year and tighter cash conditions set by India’s central bank this week will not impact lending to productive parts of the economy, the finance minister said.
The central bank said on Tuesday it was raising banks’ reserve requirements, a move aimed at draining surplus cash from the banking system stemming from strong capital inflows.
Finance Minister Palaniappan Chidambaram told reporters on Wednesday that banks’ balance sheets were healthy enough to absorb the increase, but the decision would reduce their net interest margins by 0.03%.
“My view is that it is possible for public sector banks to absorb this small hit on their balance sheets,” Chidambaram said after meeting state-run bank bosses.
“Given the excess liquidity and the current situation, banks are inclined to lower their deposit rate on one-year term deposits by about 50 basis points. By and large, there is no serious impact by the new monetary policy announcements.”
The central bank raised interest rates five times between June last year and March. Growth in bank lending has moderated to just over 24% annually, in line with the central bank’s goal for the year, from 30% in the past three years.
The central bank has been concerned about lending growth and inflation, including asset price inflation, which has been fuelled by the surge of cash coming in from foreign investment in stocks, funds raised via debt overseas and rupee intervention.
Chidambaram said lending to real estate had come down but the Reserve Bank of India was concerned about liquidity, adding: “It’s a legitimate concern.”
The chairman of State Bank of India, the country’s largest lender, said he did not expect upward pressure on interest rates due to the central bank’s decision.
“Interest rates are in stable-to-down phase. I don’t see any upward pressure,” O.P. Bhatt told reporters.