LENDING RATES TO RISE, ALBEIT WITH A LAG

Bankers say high interest rates may lower credit growth this financial year.

With the Reserve Bank of India (RBI) raising key policy rates by 25 basis points to 8.25 per cent on Friday, bankers said they would follow suit, though adding the transmission may come with a lag. Bankers also said high interest rates may lower credit growth further this financial year.

State Bank of India (SBI), the country’s largest lender, would increase the base rate, though that may not happen immediately. “Yes, the bank will pass on the interest rate rise to customers. This is what RBI wants banks to do. SBI may not raise the rate immediately,” said SBI Managing Director, A Krishna Kumar. At 10 per cent, SBI’s base rate is the lowest among its peers.

During the first quarter policy review in July, the central bank had raised the repo rate by 50 basis points. Banks had then responded by increasing their base rates.

Slower offtake in credit growth is one reason why banks are in no hurry to raise lending rates. However, with the festive season about to begin, banks hope credit growth gains momentum. “To increase the lending rate, the trigger has to come from the deposit side. Deposit mobilisation has been good so far. As of now, there is no urgent need to raise deposit rates, since credit growth has been muted so far this financial year. However, credit growth is expected to pick up, as we approach the festive season. So, the rise in lending rate may happen with a lag,” said Canara Bank Chairman and Managing Director, S Raman.

Bank of Baroda feels since liquidity conditions are still comfortable, barring this week (owing to advance tax outflows), transmission may take some time. “Right now, the liquidity condition is reasonably good. We would look at the credit growth trends in the second half, when credit offtake picks up due to the festive season. This would decide if we want to increase the base rate. We had raised base rates recently. Thus, the transmission from our end would not be immediate,” said Bank of Baroda Chairman and Managing Director, M D Mallya.

As interest rates continued to rise in the last one and half years, RBI had cut the credit growth target to 18 per cent for the current financial year from 19 per cent projected at the beginning of the financial year. While year-on-year credit growth stood at around 20 per cent, and is expected to increase during the second half of the year, bankers feel the target may be further scaled down. “Credit growth picks up in the second quarter. But this year, the growth may not be as high as that seen last year,” said Bank of India Chief Financial Officer Ravi Kumar.

Indian Overseas Bank Chairman and Managing Director M Narendra said credit growth target for this financial year had been cut to 19 per cent from the earlier 22 per cent, in line with industry expectations. “Depending on how the credit growth picks up, we will take a call on whether or not to increase the base rate by 25 basis points. If credit growth rises, we would have to garner more deposits, and deposit rates would have to be increased. In this case, we will look at increasing the base rate,” he said.

Asset quality would be another factor that banks would consider, while raising the base rate. This is because growing non-performing assets (NPAs) have been a cause of concern. As chances of defaults rise with an increase in the lending rate, a rise in interest rates might lead to more NPAs.

“RBI wants these costs to be transmitted. But banks will not increase base rates immediately, as they need to take a call on an individual basis. Maintaining asset quality will play a crucial role in decision making,” said Bank of India’s Ravi Kumar.

Rising interest rates exert pressure on micro and small-scale loan portfolios, and restructured loans would be an area of concern, said SBI’s Krishna Kumar.

SOURCE: http://www.business-standard.com/india/news/lending-rates-to-rise-albeita-lag/449471/