Challenge Is to Increase Flow Df Credit: SuBank of India Governor Dr D. Subbarao released the document 'Macroeconomic and Monetary Developmentsbbaraa

R
BI Governor D Subbaro has said that there is a scope for banks to lower lending rates further. "Banks say that the demand for credit is picking up on the back of investment in projects. The bankers informed me that the demand for credit in certain segments like home and retail is picking up, which was a welcome sign. There is a scope for reducing lending rates within the policy rate adjustments already done by RBI. Interest rates for short-term credit should be about 9.5% but these are about 1O.5'YtJ. So, there is scope. As deposits contracted at higher rates mature and get re-priced, the cost of money to banks will come down and they can look to reduce lending rates," Subbarao said after presenting the first quarter review of the monetary policy on 28 July 2009.
The RBI prodded banks to lower lending rates, saying the full pass-through of the monetary policy rate changes had not taken place. Besides, it said banks could pass on the benefits of the lower cost of funds due to the reduction in deposit rates initiated over the past several months.
On being asked about the steep yield curve that may result in a liquidity trap, Subbarao said: "We do have tried to influence the yield curve. After a review, we changed the maturity profile of the government borrowing in order to manage the yields towards small loans and others."
To a question as to whether the worst is over, he said: "I wish I could definitively say that. Our financial sector only had hiccups and didn't have deep structural problems. But the challenge going forward is to increase flow of credit. We talked to bankers and they said the demand for credit had come down. We talk to the corporate sector and they say the supply has dried up, so there is a mismatch there."
INDUSTRIAL & INFRASTRUCTURE CREDIT
On the issue of measures to direct credit to the core sector and whether RBI making concessional long-term loans available to capital goods sector, he said: "We will do whatever is within the ambit of the monetary policy to ensure that there is adequate credit. The RBI's objective is to ensure credit flow to all productive sectors of the economy. The latest industrial index of production
numbers show that capital goods and consumer non­durables have still not picked up. We will also have to make sure that the credit flow is well-regulated and prudent. We cannot allow credit policy to deteriorate in order to increase flow of credit. There is no proposal to direct credit to infrastructure beyond what's already there. There have been requests to raise the single borrower limit for banks lending to corporates. But we have decided not to increase the limit. We can't ensure directed flow of credit to particular sectors, except in crisis situations. We want long-term credit flows to improve."
MANAGING GROWTH
To a question as to assessment of how much capital is required by the banks, he said: "We have an assessment of the capital required. We are not in a position to share that figure right now." According to RBI's revised estimate, deposit growth for commercial banks would be 19% for the current financial year. It is an upward revision from 18% set in April 2009 as part of a plan to maintain ample liquidity in the system. The money supply growth is also revised to 18%, up from 17°/<) projected in the annual policy statement issued in April this year.
It was important that the increased government borrowings did not crowd out credit flow to the private sector. The y-o-y growth in deposits till July 3 2009, was 21.9%. The outstanding deposit of banks stood at Rs 40,28,707 cr, according to RBI data. On deposit growth across bank groups, the pace of deposit growth for public sector banks has accelerated, while that for private and foreign banks has slowed down. For 12 months ended July 3, 2009, deposits with public sector banks increased 26.4%, up from 23.1 % witnessed in the preceding 12 months.
Private sector banks witnessed a slowdown in the deposit growth. The y-o-y growth in deposits nosedived to 6.7% as on July 3, 2009, from 17.4% year ago. As far as foreign banks are concerned, moderation in deposit growth was 16.4% as on July 3, 2009, from 20.9% a year ago. This was due to lower deposit base of these banks.
Bankers felt that the status quo on policy rates would anchor interest rate expectations that could spur investment demand. They indicated that they are seeing signs of revival in the domestic