Lend­ing Rates and In­vest­ment

The Economic Times - - The Edit Page -

Apro­pos the Edit ‘RBI’s New, Wel­come Stress on Liq­uid­ity’ (Apr 6), even if banks lower their lend­ing rates, will in­vest­ment pick up in the next hal­fyear? RBI data re­veal that dur­ing De­cem­ber 2014-March 2016, weighted av­er­age lend­ing rate for new loans fell 90 per­cent­age points, whereas in­dus­trial credit rose just 7.3%. A re­vival in the an­i­mal spir­its is leashed by is­sues such as the ‘once-bit­ten-twiceshy’ mood of the banks. Sec­ondly, lend­ing rate cuts will be fol­lowed by higher cuts in de­posit rates, ex­ac­er­bat­ing de­pos­i­tors’ pain. Dur­ing this pe­riod, while the me­dian base rate came down by 60 per­cent­age points, the me­dian de­posit rate fell 80 per­cent­age points.

Our in­tu­ition says the liq­uid­ity con­di­tions are be­ing re­laxed to fa­cil­i­tate (a) an­tic­i­pated gov­ern­ment bor­row­ing for this fis­cal year, and (b) ex­pected ma­tu­rity in Septem­ber of FCNR(B) de­posits swapped three years ago. Nev­er­the­less, if, at all, it is in­tended for banks to lean on the mar­ket to on-lend, it would be a de­feat of the clas­si­cal ‘fi­nan­cial in­ter­me­di­a­tion’ func­tion of banks and may breed ALM mis­match. And ‘trans­mis­sion’ has not been thwarted by lack of liq­uid­ity, but by banks’ in­abil­ity to man­age with lower NIM and lower bur­den, the lat­ter be­ing driven by ex­oge­nous fac­tors.

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