A leading bank has reduced interest rates by up to 350 basis points for certain categories of borrowers even before the RBI’s mid-quarter policy review. Does this mean that there is no relationship between policy announcements and action by banks?
When the Benchmark Prime Lending Rate (BPLR) system was in vogue, the prime borrowers with CR1, or the best credit rating, were expected to get credit limits at BPLR declared by banks and those with lower credit rating CR2 onwards at higher interest rates according to the risk perception of the bank on the borrowers.
But, in practice, it was observed that even borrowers in the CR3 and CR4 categories were getting credit limits at 2-3 per cent below BPLR. Banks attributed this phenomenon to liquidity in the system then and multiple banking “dharma”.
“If we do not sanction at this rate, other banks will wean away such a good proposal and 2-3 per cent below BPLR is better than call money rates,” the bankers used to say. The basic problem appears to be that when the excess liquidity position has changed, banks are not able to charge interest rates as per credit rating.
Credit below BPLR
It would be interesting to study what percentage of credit (non-mandatory) was sanctioned at rates below BPLR. One guess is that it should be around 40-45 per cent.
It would be interesting to study the yield a bank gets from the large credit vertical. Again, the guess is that it would not be more than 7-8 per cent. Now, it could also be studied whether there is cross-subsidisation of borrowers in large credit vertical by borrowers taking educational/housing/vehicle/other personal loans, even by a small percentage.
It is felt that the yield a bank gets from educational and housing loans is around 13-14 per cent. One is not sure if the system of base rate has brought about transparency in charging interest on different categories.
NPA load
Another issue is the impact of increasing load of NPAs (non-performing assets) on the net interest income. The problem gets accentuated when there is a divergence between “the figure of NPAs generated by the computerised system” and “figure of NPAs available at credit departments”.
It would be worthwhile to study the impact of interest rates on the liabilities side of the balance-sheets of banks. One could make a tenor-wise study of term deposits of banks and the skew towards deposits of six, nine months and one year.
What is the percentage of deposits in this category and is there uniformity in payment of interest to the depositors? One feeling is that cash-rich bodies, corporate or otherwise, twist the arms of banks to get higher interest rates.
The impact of short-term, wholesale and high-cost deposits on the mix of interest rates could be subject to detailed study. One feels that when such term deposits are pooled with CASA (current account, savings account) deposits and used to finance long term infrastructure projects liquidity problems are built in automatically.
One is reminded of a statement made by an eminent faculty member of a premier training institution that the clamour for reduced interest rates comes because the entrepreneur comes from “shops and not workshops”.
Working capital
Impact of interest rates can be controlled effectively if the borrower manages his working capital well. Interest rates, however low, may not improve production/ profitability as long as shortages of power, bottlenecks in movement of inputs and outputs to/from factories, oil shocks and uncertainties in fiscal policy, currency rate fluctuations, labour environment, and so on, daunt the borrowers.
It does not appear realistic to blame the formulation of monetary policy alone for all the ills of the economy. The impact of the aberrations in the transmission mechanism should be studied in depth and remedial measures taken for the policy measures to deliver the goods.
(The author is a former Chief General Manager, Reserve Bank of India.)