Bankers see higher interest rates, strong credit growth in 2010

Bankers see higher interest rates, strong credit growth in 2010

Mumbai: With a substantial recovery from the economic slowdown expected in 2010, top bankers have said this could well be translated into a healthy pick up in the bank credit growth, but may also result in a higher interest rate regime.

Also, a ballooning food inflation and advancing wholesale-price inflation might soon force the Reserve Bank, which unfolded its first phase of monetary stimulus exit by restoring SLR in October, to effect a “twin" action, hiking CRR and policy rates beginning from early next year, they said.

With liquidity surplus in the system, a hike in Cash Reserve Ratio, the percentage of amount banks should keep with RBI, will help to mop up the excess, after which the central bank could start raising its lending and borrowing rates (repo, reverse repo), to exit from the easy money regime, bankers said.

“The year 2009 was quite eventful for banks and it showed the resilience of the system to a huge crisis in related markets.

“As we move ahead, when we shun the impact of slowdown, I expect the bank credit growth to revive considerably, which may result in upward movement of lending rates as well," Bank of Baroda chairman and managing director M D Mallya said.

Bank credit, which grew around 10% in November, remained muted largely because corporates opted for non-banking sources for cheap finance in view of the sufficient liquidity conditions, Mallya said, adding once the RBI sucks out excess money, corporate borrowers are likely to come back to banks.

RBI is widely expected to lift its policy rates by at least 0.5% by April while a 0.5% hike in CRR could happen as early as in January, bankers said.

Oriental Bank of Commerce CMD T.Y. Prabhu echoed the view saying that the industry is poised for a healthy revival in business in the next year and corporate demand is likely to go up in the next quarter.

“We can see corporates coming back with their project proposals as the economic activities picking up. The pick up is already happening. This would only go better in the months ahead and I’m quite optimistic about the new year," Prabhu said.

There are unlikely to be any issues in the bank’s Non-Performing Assets (NPAs) over the next one year in the banking industry as the Reserve Bank has ensured adequate provisions from lenders -- the latest measure hiking the risk weight for commercial real estate loans and raising loan loss coverage ratio to 70%.

“I do not see any alarming signs on the banks’ NPAs as most of the banks have done adequate provisioning for likely defaults. The RBI’s decision to hike the loan loss coverage ratio to 70% is also a prudent move. I think all the banks will achieve that in the set time-frame," IndusInd Bank’s head Global Banking Group J Moses Harding, said.

Bankers also expect the consolidation talks in the Indian banking system to gain momentum in 2010 both in public and private sectors, as it is warranted by evolving competition in the global banking space.