Top bankers on Tuesday suggested that the Reserve Bank of India cut key policy rates and the cash reserve ratio to spur growth.
Further, with stress building up in sectors such as steel, textiles, and power, they want the central bank to allow them to restructure the debt of manufacturing units in these sectors for a second time without downgrading the asset classification.
Bankers say its time the central bank's monetary policy turned accommodative as the second quarter GDP growth has slowed to 6.9 per cent (8.8 per cent in Q2 of FY2011); the index of industrial production saw a de-growth of 5.1 per cent in October 2011 (11.3 per cent growth in October 2010); and the year-on-year credit growth slowed to 17.1 per cent as on December 16, 2011 (23.9 per cent).
With inflation thawing, thanks to the food inflation rate turning negative (-3.36 per cent) during the week ended December 24 as compared to a growth of 0.42 per cent in the previous week, the time may be opportune for a cut in the interest rate at which RBI lends to the banks (repo rate).
“If growth has to happen and investments have to take place in the economy, then the RBI should send a signal by cutting policy rates,” said Dr K. Ramakrishnan, Chief Executive, Indian Banks' Association.
Top bankers, including Mr Pratip Chaudhuri, Chairman, State Bank of India, Mr M. D. Mallya, Chairman and Managing Director, Bank of Baroda, and Ms Chanda Kochhar, MD and CEO, ICICI Bank, met the RBI top brass on Tuesday for the pre-policy consultative meeting.
Since March 2010, the RBI has raised its policy rate 13 times to rein-in inflationary pressures. The central bank paused in its Mid Quarter Monetary Policy Review last month. Then the RBI reasoned that while inflation remains on its projected trajectory, downside risks to growth have clearly increased.
Liquidity
Though bankers have made out a case for a cut in the cash reserve ratio, currently at 6 per cent of deposits, so that liquidity pressures that are likely to emerge down the line are taken care of, the Reserve Bank's view is that the liquidity position is comfortable.
Asset quality concerns
With asset quality concerns emerging in the steel and textiles sectors on account of external factors, bankers want the central bank to allow them to restructure loans for a second time without having to make provisioning.
As per the RBI's restructuring guidelines, if an asset, which has been restructured once, comes up for restructuring again then its asset classification has to be downgraded and provisioning made. This has bottom-line implications.
However, the RBI is disinclined to allow second-time restructuring of an asset without provisioning. The reluctance of the RBI in this regard stems from the fact that if this dispensation is allowed in the case of one or two sectors, then it will open the floodgates for such requests from other sectors.
“When the economy is in a downturn phase, there will be pressures on asset quality. There are asset quality concerns in sectors such as aviation, textiles, steel, and power,” said Mr Ramakrishnan.