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Currently, the RBI’s policy rate is pegged at 8%. Photo: Hindustan Times
Currently, the RBI’s policy rate is pegged at 8%. Photo: Hindustan Times

Six things to watch out for in 2015

An interest rate cut can begin as early as in February or as late as April

One: Every man and his dog knows that the interest rate in India will come down but the question is when and by how much? Currently, the Reserve Bank of India’s (RBI) policy rate is pegged at 8%. The rate cut can begin as early as in February when RBI announces its next bimonthly policy or as late as April when it unveils its monetary policy for the next fiscal year. Or, even in March, immediately after finance minister Arun Jaitley announces the Union budget. “A change in monetary policy stance is likely early next year, including outside the policy review cycle," the last policy document said. It has put two conditions—continuation of the current inflation trend and changes in inflationary expectations, and encouraging fiscal developments.

Dropping for the sixth consecutive month, India’s wholesale price inflation slipped to zero in November, its lowest since January 2009. The retail inflation in December was 4.4%. Indeed, it will not stay at this level in the coming months because of the so-called base effect, but it is fairly certain that RBI will achieve its target of containing retail inflation at 6% by January 2016—much ahead of schedule. So, a rate cut is a few weeks away. I would think it will happen immediately after the budget.

Two: Will the rate cut help in changing the investment climate and ensuring growth in bank credit? Demand for bank loans in the first nine months of the current fiscal year dropped to its lowest since 1998—the earliest data available on the RBI website. Between April and mid-December, the banking industry’s loan portfolio grew just 2.68%. There are reasons behind this tardy credit growth. Corporations have been raising money through short-term commercial papers as well as overseas borrowings; besides, lower working capital demand from state-owned oil companies because of the recent drop in oil prices has also contributed to the lower demand for credit. However, the overall theme of the last year is Indian corporations’ unwillingness to make fresh investments. All of us will be happy to see a change in sentiment and higher growth in bank credit in 2015. A drop in the loan rate will certainly play a role in propping up bank credit.

Three: Corporations’ lack of will to borrow money from banks is only one side of the story behind tardy credit growth. On the other side is banks’ unwillingness to lend. Yes, banks are not too excited to lend for fear of piling up bad assets. Gross non-performing assets, or NPAs, of 40 listed banks grew 17.5% to 2.69 trillion in the quarter ended September from 2.29 trillion a year ago. Banks have also restructured a cumulative 3.67 trillion of loans until 30 September on the corporate debt restructuring (CDR) platform. Outside the CDR, there have been bilateral agreements on loan restructuring between banks and their borrowers; the money involved could be as much as 3.5 trillion. Overall, NPAs and restructured loans could be as much as 12% of total banking assets.

Will the scene change for the better in 2015? If the economy looks up and the loan rate drops, it could happen. In the September quarter, State Bank of India’s gross NPAs dropped to 4.89% of its advances from 5.64% a year ago and this could be the beginning of the good times. Meanwhile, RBI, too, has tightened the screws on bank customers who default on loans despite having the ability to repay, creating a new category of borrowers classified as “non-cooperative", in addition to “wilful" defaulters. RBI governor Raghuram Rajan’s view on this issue is well known. According to him, “promoters do not have a divine right to stay in charge regardless of how badly they mismanage an enterprise, nor do they have the right to use the banking system to recapitalize failed ventures".

Four: At the two-day Gyan Sangam in Pune over the weekend—the first of its kind—finance minister Arun Jaitley promised a hands-off policy, with no interference from the government in the operations of public sector banks. He also spoke about importing talent from the market. The government seems to be serious on changing the ways public sector banks have been working—piling up bad assets and fraught with corporate governance issues. Jaitley’s assurance came a week after the finance ministry named chiefs of four public sector banks and split the chairman-cum-managing director’s (CMD) position into two—chairman and managing director. The government is still on the lookout for chiefs of four relatively large banks and, of course, chairmen of banks. Public sector banks account for 70% of the Indian banking industry and reforms in this segment are critical for the economy. Will the government bring down its stake in these banks below 51% to give banks more autonomy? Will it open up the corner room of public sector banks to the market because the talent pool is too shallow? Shall we see a recast of the boards of public sector banks? We will get some of the answers in 2015 if the government walks the talk.

Five: Two new banks, Bandhan Financial Services Ltd and IDFC Ltd, will set up shop latest by October this year, marking the entry of a third set of new private banks in India since 1994. Both the entities have committed to expand banking services in Asia’s third-largest economy where roughly two out of three adults do not have access to formal banking. It will be interesting to watch how they rewrite the banking rules.

Six: Finally, RBI has gone ahead and introduced differentiated banking licensing in India, asking for applications to set up small finance banks and payments banks. One can expect the regulator to be a bit liberal in granting licences to the two sets—at least half-a-dozen each—to change the banking landscape in India.

Tamal Bandyopadhyay, consulting editor of Mint, is adviser to Bandhan Financial Services Pvt. Ltd, India’s newest bank in the making. He is also the author of Sahara: The Untold Story and A Bank for the Buck. Email your comments to

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