Indian banks have told the Reserve Bank of India which has raised rates 13 times since February 2010 to cool inflation to change course and keep interest rates steady as they fear asset quality will be further impaired with high interest rates and a slowdown in growth.
At a meeting with the Governor of the RBI D Subbarao on Tuesday, several bank CEOs made out a strong case for a pause on the rate action front saying that another rate increase at this juncture would hurt not only industry but also the business of banks.
Banks are struggling to boost loan growth and also to protect their margins with the level of bad loans on the rise. Loan growth year to date has is close to 2.6 % compared to 3.4 % a year ago. The RBI has projected a loan growth of 19 % for FY 12.
The RBI will review its monetary policy in the last week of October.
K Ramakrishnan, CEO of Indian Bank Association, the lobbying arm of local lenders told media persons after today's meeting that bankers have sought a pause in policy since loan growth is muted and has been below expectations. "Capital expendtiture is virtually on a standstill and investment is not really happening. Therefore bankers are concerned. Whatever the credit growth is - is because of the pipeline proposal sanctioned," he said. "There is a feeling that bad loans can go up and therefore the provision requirements will increase in the course of the next year and net interest margins may be coming down," he said.
State run lenders are feeling the pressure more with a rise in bad loans which has forced them to set aside more funds to provide against deterioration in asset quality.
A senior banker who attended the meeting said that lenders had also sought a pause on the interest rate front keeping in view the uncertainties in the US and European markets.
"There is also a fear that high interest rates may result in defaults particularly by small and medium size companies which may not be better positioned to absorb higher interest cost," he said.
Most banks have raised lending rates by 250 to 300 basis points over the last 12 to 15 months.
Bankers have also told the RBI that they are also worried about bad loans rising in industries such as textile, steel and power industry.
In the same context some banks have sought from the central bank a special dispensation for restructuring of loans. In 2008, during the global meltdown, as a special one time dispensation, RBI had allowed banks to restructure loans without categorising them as substandard assets.
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