Friday, November 2, 2012

India's debt not sustainable, says Chidambaram news



domine-b. :31 Oct 2012

Finance minister P Chidambaram today said the country's debt is not sustainable and sought support of all political parties in strengthening the government's efforts to contain both fiscal and current account deficit.

The debt of a country must be sustainable and should be within limits, Chidambaram said adding that no country can live beyond its means

He said that the countries, which have accumulated un-sustainable level of debt are now facing economic and financial problems.

Addressing the fourth meeting of the consultative committee attached to his ministry on the issue of `The Economic Impact of Internal and External Debt', the finance minister said the best efforts would be made to contain the country's fiscal deficit at 5.3 per cent, during the current financial year even though the Kelkar Committee has projected it at around 6.1 per cent.

He said though the target of 5.3 per cent is a challenging one, it is still doable. The strategy to achieve the target would be to maximise revenue collections and control expenditure. Chidambaram had, yesterday, unveiled a roadmap for fiscal consolidation.


On the current account deficit (CAD), which presently stands around $70.3 billion, he said, he hoped to bridge the gap through FDI, FIIs and ECBs.

In this regard, he said FDI is not an option, but an imperative, failing which we will have to rely on borrowings to meet the current account deficit. 

He sought the support of members of all the political parties in strengthening the government's efforts to contain both the fiscal deficit and current account deficit.

RBI revises norms for rehabilitation of small units


BL : Nov 2,2012

Says decision on viability of the unit should be taken not later than three months of the unit becoming sick
The Reserve Bank of India (RBI) has revised the guidelines on rehabilitation of sick micro and small enterprises to hasten the process of identification of such units by commercial banks.
Based on the recommendations of the working group chaired by Deputy Governor K. C. Chakrabarty, the RBI has suggested that an MSE is considered ‘sick’ when: any of the borrowal account of the enterprise remains a non-performing asset (NPA) for three months or more; or if there is erosion in the net worth due to accumulated losses to the extent of 50 per cent of its net worth during the previous accounting year.
The stipulation that the unit should have been in commercial production for at least two years has been removed.
The central bank said that the decision on viability of the unit should be taken at the earliest and not later than three months of the unit becoming sick. It also laid down the procedure for declaring a unit as unviable and defined the concept of ‘incipient sickness’.
“Timely and adequate assistance to MSEs and rehabilitation effort should begin on a proactive basis when early signs of sickness are detected, the RBI said in a statement
RBI/2012-13/273
RPCD.CO.MSME & NFS.BC.40/06.02.31/2012-2013
November 1, 2012
The Chairman/Managing Director/
Chief Executive Officer
All Scheduled Commercial Banks
(excluding Regional Rural Banks)
Dear Sir / Madam
Guidelines for Rehabilitation of Sick Micro and Small Enterprises
The recent global slowdown has adversely impacted the Indian economy in general and more specifically the Micro and Small Enterprises (MSEs). The MSEs suffer the most in such situations especially from discontinuity of business, which they normally are not in a position to bear and become sick immediately. The feedback received by us at various fora on MSEs and our analysis shows that the identification of sickness in MSE enterprises is so late that the possibilities of revival recede. This necessitates a need for change in the definition of sickness in order to remove the delay factor.
2. In recognition of the problems being faced by the Micro and Small Enterprises (MSE) particularly with respect to rehabilitation of potentially viable sick units, the Reserve Bank had constituted a Working Group under the Chairmanship of Dr. K. C. Chakrabarty, then Chairman & Managing Director, Punjab National Bank.The Working Group, among others, recommended a change in the definition of sickness and a procedure for assessing the viability of sick MSE units, with a view to hasten the process of identification of a MSE unit as sick. The proposal to revise the existing definition of sickness and procedure for assessing the viability of sick MSE units was placed in the 13th Standing Advisory Committee on MSMEs wherein it was decided that the Ministry of MSME, Government of India would constitute a Committee to examine the submission of the report of the Committee it was proposed in Paragraph 83 of the Second Quarter Monetary Policy Statement 2012-13, to modify the existing definition of sickness of micro and small enterprises (as defined in the MSMED Act 2006) and lay down a procedure for assessing the viability of sick units in the sector in supersession of guidelines mentioned in our circular RPCD. No. PLNFS.BC.57/06.04.01/2001-2002 dated January 16, 2002.

3. The emphasis of the revised guidelines is to hasten the process of identification of a unit as sick, early detection of incipient sickness, and to lay down a procedure to be adopted by banks before declaring a unit as unviable. Accordingly, the revised guidelines are issued for rehabilitation of sick units in the MSE sector as given in Annex – I.
4. The important changes brought out in guidelines based on the recommendations of the Working Group vis-à-vis the existing guidelines on rehabilitation of sick MSE units are furnished in Annex – II for ready reference.
5. We need hardly emphasize that timely and adequate assistance to potentially viable MSE units which have already become sick or are likely to become sick is of the utmost importance not only from the point of view of the financing banks but also for the improvement of the national economy, in view of the sector’s contribution to the overall industrial production, exports and employment generation. The banks should, therefore, take a sympathetic attitude and strive for rehabilitation, in respect of units in the MSE sector, particularly wherever the sickness is on account of circumstances beyond the control of the entrepreneurs. However, in cases of units, which are not capable of revival, banks should try for a settlement and / or resort to other recovery measures, expeditiously.
6. Please acknowledge receipt.
Yours faithfully,
(C D Srinivasan)
Chief General Manager
-------------------------------------------------------------------------------------------------------------------------------------------------------------------
Annex – I
GENERAL GUIDELINES FOR REHABILITATION OF SICK MSEs
A. Handholding stage
1. Timely and adequate assistance to MSEs and rehabilitation effort should begin on a proactive basis when early signs of sickness are detected. This stage would be termed as ‘handholding stage’ as defined below. This will ensure intervention by banks immediately after detecting early symptoms of sickness so that sickness can be arrested at an early stage. An account may be treated to have reached the ‘handholding stage’; if any of the following events are triggered:
a. There is delay in commencement of commercial production by more than six months for reasons beyond the control of the promoters;
b. The company incurs losses for two years or cash loss for one year, beyond the accepted timeframe;
c. The capacity utilization is less than 50% of the projected level in terms of quantity or the sales are less than 50% of the projected level in terms of value during a year.
2. The bank branches should take timely remedial action which includes an enquiry into the operations of the unit and proper scrutiny of accounts, providing guidance/counselling services, timely financial assistance as per established need and also helping the unit in sorting out difficulties which are non-financial in nature or requiring assistance from other agencies. In order to ensure timeliness for banks for taking remedial action/measures in ‘handholding stage’, the handholding support to such units should be undertaken within a maximum period of two months of identification of such units.
B. Definition of Sickness
3. A Micro or Small Enterprise (as defined in the MSMED Act 2006) may be said to have become Sick, if
a. Any of the borrowal account of the enterprise remains NPA for three months or more
OR
b. There is erosion in the net worth due to accumulated losses to the extent of 50% of its net worth during the previous accounting year.
4. This would enable banks to take timely action in identification of sick units for their revival. The MSE units which could not be revived after intervention by banks at the ‘handholding stage’ need to be classified as sick subject to complying with any one of the two conditions as laid down above and based on a viability study the viable/potentially viable units be provided rehabilitation package. The rehabilitation package should be implemented speedily in a time bound manner. The rehabilitation package should be fully implemented within six months from the date the unit is declared as ‘potentially viable’ / ‘viable’. While identifying and implementing the rehabilitation package, banks are advised to do ‘holding operation’ for a period of six months. This will allow small-scale units to draw funds from the cash credit account at least to the extent of their deposit of sale proceeds during the period of such ‘holding operation’.
5. Units becoming sick on account of willful mismanagement, willful default, unauthorized diversion of funds, disputes among partners / promoters, etc. should not be classified as sick units and accordingly should not be eligible for any relief and concessions. In such cases steps should be taken for recovery of bank’s dues. The declaration of a borrower as a willful defaulter should be done strictly in accordance with the extant RBI guidelines.
6. The above definition may be adopted for the purpose of reporting the data for the year ending 31 March 2013, while for the purpose of formulating nursing programme; banks should go by the above definition with immediate effect.
C. Viability
7. The decision on viability of the unit should be taken at the earliest but not later than 3 months of becoming sick under any circumstances.
The following procedure should be adopted by the banks before declaring any unit as unviable:
a. A unit should be declared unviable only if the viability status is evidenced by a viability study. However, it may not be feasible to conduct viability study in very small units and will only increase paperwork. As such for micro (manufacturing) enterprises, having investment in plant and machinery up to Rs.5 lakh and micro (service) enterprises having investment in equipment up to Rs. 2 lakh, the Branch Manager may take a decision on viability and record the same, along with the justification.
b. The declaration of the unit as unviable, as evidenced by the viability study, should have the approval of the next higher authority/ present sanctioning authority for both micro and small units. In case such a unit is declared unviable, an opportunity should be given to the unit to present the case before the next higher authority. The modalities for presenting the case to the next higher authority may be worked out by the banks in terms of their Board approved policies in this regard.
c. The next higher authority should take such decision only after giving an opportunity to the promoters of the unit to present their case.
d. For sick units declared unviable, with credit facilities of Rs.1 crore and above, a Committee approach may be adopted. A Committee comprising of senior official of the bank may examine such proposals. A Committee approach will improve the quality of decision as collective wisdom of the members shall be utilized, especially while taking decision on rehabilitation proposals.
e. Decision of the above higher authority should be informed to the promoters in writing. The above process should be completed in a time bound manner not later than 3 months.
8. The banks may, however, take decision in cases of malfeasance or fraud without following the above procedure.
D. Reliefs and Concessions for Rehabilitation of Potentially Viable Units
9. Banks may decide on the reliefs and concessions for rehabilitation of viable/potentially viable units based on their own Board approved policies as conveyed in our circular RPCD.SME & NFS.BC.No.19/06.02.31/2011-12 dated September 12, 2011.
E. One Time Settlement
10. The banks are to put in place a Non-discretionary One Time Settlement scheme for recovery of non-performing loans for the MSE sector, duly approved by the Board of Directors as conveyed in circular No.RPCD.SME&NFS.BC.No.102/06.04.01/2008-09dated May 4, 2009. It is also reiterated that the One Time Settlement scheme implemented by the bank is given wide publicity by placing it on their bank’s website and through other possible modes of dissemination. You may also allow reasonable time to the MSE borrowers to submit the application and make payment of the dues in order to extend benefits of the scheme to the eligible borrowers.
F. Delegation of Powers
11. The delay in the implementation of agreed rehabilitation packages should be reduced. One of the factors contributing to such delay was found to be the time taken for obtaining clearance from the Controlling Office for the relief and concessions. As it is essential to accelerate the process of clearance, the banks may delegate sufficient powers to senior officers at various levels such as district, divisional, regional, zonal and also at head office to sanction the rehabilitation package drawn up in conformity with the prescribed guidelines.
ANNEX – II
Important changes brought out in the revised guidelines based on the recommendations of the Working Group on Rehabilitation of sick MSE units vis-à-vis Existing Guidelines
Sr. No.
Existing Guidelines
New Guidelines
1
A MSE unit is considered sick when:
a) If any of the borrowal accounts of the unit remains substandard for more than six months i.e. principal or interest, in respect of any of its borrowal accounts has remained overdue for a period exceeding 1 year. The requirement of overdue period exceeding one year will remain unchanged even if the present period for classification of an account as sub-standard is reduced in due course;
OR
b) There is erosion in the net worth due to accumulated cash losses to the extent of 50 per cent of its net worth during the previous accounting year; and
AND
c) The unit has been in commercial production for at least 2 years.
A MSE is considered ‘sick’ when –
a) any of the borrowal account of the enterprise remains NPA for three months or more
OR
b) There is erosion in the net worth due to accumulated losses to the extent of 50% of its net worth.
The stipulation that the unit should have been in commercial production for at least two years has been removed.
2
No stipulated time frame for deciding the viability of a unit.The decision on viability of the unit should be taken at the earliest but not later than 3 months of becoming sick under any circumstances.
3
The procedure for declaring a unit as unviable not specified.The procedure for declaring a unit as unviable has been laid down
4
While the concept of incipient sickness was there was no definition of incipient sicknessIncipient sickness or ‘handholding stage defined.


Banks have turned risk averse after facing steady rise in bad loans: RBI




Atmadip Ray, ET Bureau Oct 29, 2012, 07.55PM IST


KOLKATA: Banks have turned risk averse after facing steady rise in bad loans, Reserve Bank of India said.
The RBI said that banks' gross and net non-performing assets ratios slipped further during April-June quarter after showing a worsening trend in the last fiscal across bank groups. "Deterioration in the assets quality and in the macroeconomic conditions resulted in added risk aversion in the banking sector," it said.
This led to a portfolio switch from credit creation to investments in government securities on the back of government's large market borrowing. Commercial banks were holding around 28% of their net deposits in government securities as on September 30, 2012.
Banks' collective gross NPA ratio slipped to 3.25% in the June quarter from 2.94% a quarter back. The slip in bad loan ratios were maximum for the public sector bank group, which account for nearly three-fourth of total banking sector advances.
The slippage ratio or ratio for fresh NPAs deteriorated too at 3.04% from 2.60%, indicating additional stressto the sector. Banks booked fresh NPAs across sectors like iron and steel, textile, airlines, power and retail.
RBI said all banks have seen a fall in year-on-year credit growth at end-September.
"Monetary and credit aggregates remain below their indicative trajectory," the central bank said in its monetary and macroeconomic review.
"The current credit slowdown largely indicates tepid demand conditions and distinctively lower credit expansion by public sector and foreign banks partly reflecting their risk aversion."

Burdening public banks with private losses



C P Chandrasekhar & Jayathi Gosh : BL : 30 OCT 2012


Routine assessments of financial stability extol the robustness of India’s banks and their ability to bear stress. But this is largely because large, questionable loans to private investors in capital-intensive sectors have been restructured to keep them ‘performing,’ argue C.P. Chandrasekhar and Jayati Ghosh in this edition of MacroScan.
Ever since liberalisation opened up and deregulated the markets and institutions that constitute India’s financial system, the positive effect that has had on India’s banks has been a periodic refrain. Two sets of indicators are used to support that argument. The first is the sharp fall in the share of non-performing loans to total, with the ratio of gross non-performing assets (NPAs) to gross advance falling from close to 16 per cent in the mid-1990s to as low as 2.5 per cent a decade later, where it has remained since. As a ratio of total assets too those NPAs have fallen from 7 per cent to less than 1.5 per cent (Chart 1).
The second set of indicators point to the successful adoption by India of Basel norms in both their first and second versions, with the capital to risk-weighted assets ratio being well above 12 per cent in the case of almost all scheduled commercial banks. With the major banks stripped of their NPAs and extremely well capitalised, India’s banking system seems a model to hold up to the rest of the world. Those who had predicted that liberalisation would increase the fragility of the banking system had been shown to be wrong, it is therefore argued.
This performance was particularly creditable because the system was displaying enhanced robustness in the midst of a sharp increase in credit advanced by the banking sector. Thus the ratio of credit outstanding to GDP, which stood at around 2 per cent just prior to liberalisation and remained around that level till the end of the 1990s, rose sharply in a period of rapid growth to reach 5.2 per cent in 2007-08 and 5.6 per cent in 2011-12 (Chart 2).

OUR SUB-PRIME

There was, of course, some cause for concern as a result of a couple of post-liberalisation developments to which even the central bank as the principal regulator had on occasion drawn attention. Significant among these was a shift in lending by the banking system away from the productive sectors to the retail sector, with personal loans accounting for a rising share of the total.
As Chart 3 shows, between the end of the 1990s (March 1998) and March 2011, the share of industry in total advances (which, as mentioned, was rapidly rising) fell from 49 per cent in 1998 to 38 per cent in 2004 and remained around that level till 2011. On the other hand, the share of personal loans rose from 10.5 per cent in March 1998 to 20.3 per cent, though it stood at a lower 16.4 per cent in 2011, as a part of the slowdown that had begun to affect the economy. Much of the retail lending was to the housing sector, with automobile and education loans being quite significant too.
As in the case of the sub-prime market elsewhere in the world, this expansion of retail lending had brought into the universe of borrowers a set of households that did not have secure employment, could not offer much collateral and often had borrowed more than they should. This could, when economic circumstances change, lead to default rates that would be difficult to provide for and cover and pointed to an increase in potential fragility. It was such expansion in retail lending that prompted former central banker S.S. Tarapore to call for caution with regard to India’s own version of the sub-prime problem.

GOVERNMENT PRESSURE

It is now becoming clear that such signs of potential fragility have been accompanied by another form of increased fragility resulting from changed lending behaviour and liberalised regulatory practices. The source of this fragility was the Union Government’s decision to use the banking system as an instrument to further an aspect of its larger liberalisation agenda: the entry of the private sector into core infrastructural areas involving lumpy capital intensive investments in power, telecommunications, roads and ports, and sectors such as civil aviation.
Under normal circumstances, banks are not expected to lend much to these areas as it involves a significant maturity and liquidity mismatch: banks draw depositors from savers in small volumes with the implicit promise of low income and capital risk, and high liquidity. Infrastructural investments require large volumes of credit and do involve significant income and capital risk, besides substantial liquidity risk. So what is required for supporting infrastructural investment are increased equity flows from corporate or high net-worth investors and the expansion of sources of long-term credit such as a bond market.
Neither of these, especially the latter, occurred in adequate measure. Rather, the development financial institutions with special access to lower-cost financial resources, which were created as providers of long-term finance, had been shut down as part of liberalisation. Hence, besides recourse to external commercial borrowing, many infrastructural projects had to turn to the banking system. As is to be expected, private banks have been unwilling to commit much to this risky business. So, it is the public banking system (besides a couple of private banks) that has moved into this area, possibly under Government pressure.

CONSEQUENCES


The figures are dramatic. The share of infrastructural lending in the total advances of scheduled commercial banks to the industrial sector rose sharply, from less than 2 per cent at the end of March 1998 to 16.4 per cent at the end of March 2004, and as much as 31.5 per cent at the end of March 2012 (Chart 4).
That is, while the share (though not volume) of lending to industry in the total advances of the banking system has fallen, the importance of lending to infrastructure within industry has increased hugely. Four sectors have been the most important here: power, roads and ports, and telecommunications, and more recently a residual ‘other’ category, reflecting in all probability the lending to civil aviation.
Unfortunately, as the exposure of the banks to these sectors has increased, the folly of “dragging” the private sector into infrastructure with concessions and cheap credit is becoming clear. The shake-out has begun in civil aviation with possibly only one airline able to show profit after many years of liberalisation.
Of the ones that were surviving until recently, the worst case is Kingfisher Airlines, which added to the effects of an erroneous policy through its own follies: bad strategy, bad acquisitions, profligacy and obvious mismanagement.
The result is that the banks that lent to Kingfisher have found themselves in a mess. If they withdraw, they invite default of the large volume of debt they have already provided. So they restructure debt, offer better terms, extend repayment periods, and provide more credit to keep the unit afloat. But they are doing so with the knowledge that unless the Government uses taxpayers’ money in some form to bail out the unit, this is merely sending good money after bad.
Thus, in 2010, the banks had got together and under the corporate debt restructuring scheme of the Reserve Bank of India restructured debt to the tune of Rs 7,720 crore owed by Kingfisher. Now, with the debt of the airline having increased by another Rs 1,000 crore or so, the airline has been forced to suspend operations with no hope of repaying the banks unless the impossible happens.

AT THE BANKS’ EXPENSE

Such restructuring of debt as is being implemented in India’s infrastructural sector clearly favours the debtor at the expense of the creditor. The RBI’s prudential guidelines define a restructured account as one where the bank, for economic or legal reasons relating to the borrower’s financial difficulty, grants to the borrower concessions that the bank would not otherwise consider.
Restructuring can involve some combination of changes in the terms of advances, such as alteration of the repayment period, reduction of the repayable amount, reduction in the rate of interest and conversion of debt to equity. It can also be accompanied by the provision of additional credit, despite the shortfall in meeting past commitments. The intent is to help the company recover. But often that intent is not realised. The only benefit is that in return for the losses the creditor institution suffers, it is in a position to treat the asset (after providing for any write-down) as a standard asset subject to conditions. But this may, in fact, provide the cover to abuse the restructuring route to bail out private investors at the expense of the banks.
As the table shows, the net result of this strategy has been that the troubled assets restructured by India’s banks had by March 2011 exceeded the identified NPAs of the banking system.
The reason is that Kingfisher is no exception — it is the tip of a debt-default iceberg that has been hidden by restructuring. The largest chunk of bank debt to infrastructure (estimated at Rs 2,69,196 crore as of March 2011) was in the power sector.
The problem in the power sector is that large capital investments, wrong technology choices, poor management, high power costs that the State distribution agencies are not able to bear given the tariffs they charge, and difficult and costly fuel supplies have all ensured that most of the high-profile private power projects are not viable.
The Government has sought to prop them up with concessions such as coal allocations without success. If this leads to failure, the bankruptcy of the private sector power companies can spill over onto the banks carrying their loans, much of which has already been restructured. According to an estimate by Credit Suisse reported in the media, 36 private thermal power projects carrying a debt of Rs 2,09,000 crore are now facing potential stress.
A chunk of bank exposure to power consists of credit to finance the losses incurred by the power distribution companies, most of which are State-owned, though privatisation has brought in non-State players. That exposure is estimated at Rs 1,50,000-1,70,000 crore as on March 2012, which is around half of total power credit.
In theory, the State-inspired restructuring has conditions attached to it that are expected to ensure that the units involved would turn around and become commercially viable. But the feasibility and viability of these liberalisation-inspired schemes are in serious doubt.
As noted earlier, the burden of financing the losses has fallen disproportionately on the public sector banks, which have seen the volume of restructured assets grow at a compounded rate of 47.9 per cent during 2009-12, when credit grew at 19.6 per cent. The comparable figures for private banks were 8.1 per cent and 19.9 per cent and for foreign banks -25.5 per cent and 11 per cent respectively. Clearly, liberalisation has not reduced but rather increased the misuse by the State of the public banking system to shore up private capital.

RBI directs banks to share information to avoid NPAs


Anita Bhoir, ET Bureau Oct 30, 2012, 11.24AM IST


MUMBAI: The Reserve Bank of India has directed banks to share information on credit exposure among themselves.

 Banks failing to adhere to this directive would be viewed seriously by the RBI and banks would be liable to action, including imposition of penalty, said the central bank in the second quarter review of the Monetary Policy. 

This announcement comes at a time when the banking sector is seeing a surge in corporate debt restructructing and rising bad loans.

Exposure to Kingfisher Airlines may become NPA for Indian Overseas Bank



B S :Neelasri Barman / Mumbai Oct 29, 2012, 16:53 IST

Two years ago the loans of Kingfisher Airlines were restructured under industry dispensation


Chennai-based public sector lender, Indian Overseas Bank (IOB) which has exposure of Rs 120 crore towards cash-strapped Kingfisher Airlines today said the account may become non-performing asset (NPA) for the bank in the current quarter (October-December). While most Kingfisher lenders already marked the account as non-performing, it is still performing for the Chennai-based lender.


According to a senior official of the bank, if it becomes a NPA then the bank will have to provide 15-25 per cent of this Rs 120 crore as provisioning in this quarter. The exposure is in the form of working capital finance. At present, the lender is treating KFA account as standard asset though payments has become due.


There are 17 banks in the consortium of lenders to Kingfisher Airlines in which State Bank of India is the leader with an exposure of about Rs 1,500 crore.

As on September 30 the gross NPAs of the bank stood at Rs 5,930 crore as against Rs 3,898 crore a year ago while net NPAs stood at Rs 3,378 crore as against Rs 1,505 crore a year ago. According to the bank's chairman and managing director M Narendra going forward the bank will focus a lot on recovery. Narendra said fresh slippage in the July-September quarter was 1,600 crore domestically and international was Rs 200 crore. 

Two years ago the loans of Kingfisher Airlines were restructured under industry dispensation. However, the airline began to default on payments. Due to this the loans turned NPAs for most lenders in the third and fourth quarters of the last fiscal.

As part of the restructuring package, part of the debt (about Rs 750 crore) was converted into equity. In March 2011, Kingfisher issued about 116 million shares (of Rs 10 each) at a price of about Rs 64 per equity share. These shares had a lock-in period of a year.

Banks received shares of the airline but the stock price plunged due to which banks had to make provisions for erosion in the value of shares. On Monday, the Kingfisher Airlines stock closed at Rs 11.75 on the BSE, a rise of 3.07 per cent.

Thursday, November 1, 2012

‘NPAs are not alarming as our banking system is robust’

RBI Governor Subbarao

Oommen A. Ninan : The Hindu ,30 October 2012



Until the economy improves, there is likelihood of these NPAs increasing, says Subbarao in his interview with Oommen A. Ninan
What was the thinking behind the CRR cut?
I have explained the rationale in the policy document. The monetary situation is determined by two variables – the policy interest rate and the liquidity conditions. We want to keep liquidity comfortable. Comfortable liquidity when interest rates are very high does not happen. Lowering interest rates when liquidity is tight does not happen.
In order to balance the growth-inflation situation, we need to calibrate both these variables such that we support growth and support easing of supply constraints but at the same time restrain inflation.
We thought that cutting repo rate at this time might dilute the RBI’s anti-inflationary stance. However, we wanted to keep liquidity comfortable so that within this liquidity, at the given repo rate, there is transmission of our policy rate to lower lending rates and all those who demand credit especially for productive activities at the current rate can get it.
Do you think this CRR cut will result in banks reducing lending rates?
That is the intention not the expectation. Credit must go to the productive centres of the economy and liquidity constraints should not inhibit that flow of credit growth.
While our repo rate reflects our anti-inflationary stance, the demand for credit at the current interest rate must translate into lending rate. That is the objective behind the CRR cut.
RBI has been regulating CRR for some time now. Do you think these funds will go for speculative activities?
Half of the money goes for speculative activity but our endeavour is to see that bank credit flows to productive sectors of the economy. There is speculation and after all, entire stock market is based on speculation. Not all speculation is bad and speculation has value. But it should not be credit going into purely speculation especially at a time when there is uncertainty in the global economic situation.
You have also said that the NPAs are not alarming but disturbing…
Let me explain what I meant by saying not alarming. I said NPAs are not alarming because our banking system is robust. The capital adequacy ratio is at 13.6 per cent at the aggregate level — and that is strong enough to withstand stresses even if NPAs were to increase substantially. That is why I said it is not alarming. But I said it is disturbing because the NPAs are increasing. In March the NPAs were at 2.9 per cent of assets. In June they had risen to 3.25 per cent of gross assets. Until the economy improves, there is likelihood of these NPAs increasing. That is why I said the position is a matter of concern although there is nothing to be alarmed about.
Do you think that the government is doing enough through its fiscal policy?
I believe the government has done quite a lot in the last few months, including politically difficult but extremely important decision of adjusting diesel prices. They have also taken measures to increase investment, especially foreign investments. From what I hear, there are a couple of operational problems at the State and district administration levels. These are areas that the government needs to focus on to help ease supply constraints.
When you said that inflationary pressure will ease in the fourth quarter, is it possible to give a time frame for this to happen?
It is very difficult at this point to say precisely at which point, if at all we might take policy action. Quarterly policy review is scheduled for January 29 so that will be an occasion to revisit the macroeconomic situation and see if we need to take a policy action.
But from current perspective, we are three months away from January-March. We expect inflation to keep going up over the next few months and then come down. We also need to look at how growth and inflation numbers come in and we will have to take a call based on that.
High interest rates affect the common man because corporates are able to access funds easily from other sources. What is your opinion?
We are concerned about the plight of the common man. We want to make sure that he has access to credit at reasonable rates of interest that he can afford. We are also concerned that there should be low and stable inflation so the common man is protected.
So, the RBI policy is aimed at making the quality of life better for the common man — balancing between a low interest rate at which it wants to borrow from the bank and a high interest rate that is demanded if we need to stave inflation.
We must also remember that we must look at not only the lending and borrowing rates but also at the cost. Several people, when I travel across the country, say interest rates are not high enough because they do not get a remunerative return on their cost. Also, we have to make sure that people can feel a positive interest on their deposits.