Lending Rates and Investment
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.