Edit & Opinion

Low Interest Rates: No good for banks, economy

Inflation is rising and would continue to rise for the next one year, says the RBI in the latest monetary policy review but refuses to increase the lending rate. The decision is fraught with risk for the banking sector and the economy as a whole. It is suspected to aid big businesses, as is the case with the farm bills, triggering the ongoing protests.   

The monetary policy rates remain unchanged for the third time this year in the bi-monthly monetary policy announced on Friday. The repo rate remains at 4 per cent. The reverse repo rate, the rate at which the RBI gets funds from banks, stands unchanged at 3.35 per cent. This is a surprise.

RBI Governor Shaktikant Das says that it is an “accommodative stance”. It cannot be about having lending rates steady EMIs for home, auto or personal loan. That remains the smallest part of the economy. Rate tinkering is always small but that gives the signal of difficult situation. The larger concern is seemingly that of corporate, who do not want any rise in lending rates as the banks of late have been tightening their purses for them in the wake of high NPAs, unfortunately from the large companies.

Speaking on inflationfigures, Das projected CPI inflation at 6.8 per cent in the third quarter (Q3) of the financial year (FY21) (December 2021) and 5.8 per cent in the fourth quarter (Q4) of FY21. He said that the Monetary Policy Committee is of the view that the inflation rate is likely to remain elevated and he expects some relief in the CPI data in the winter months. Adding that further steps are necessary to mitigate inflationary pressures.

The inflation touched a six-year high in October at 7.61 per cent. Future inflation even at 6.8 per cent, projected almost a year ahead is also beyond the RBI tolerance rate. Das, however, does not mention why the policy rates should remain low. It seems he is giving the large businesses a signal that for the next one year there would not be any change in rates.

Keeping the rates low may be a “good accommodative gesture” for those who take large loans and are responsible for the poor health of banks. The public sector banks are not in the pink of their health, despite repeated mergers. It only denotes that the banks are no more able to sprint or compete with each other. The large outages due to high lending and poor repayments have put the banking sector in distress.

The Jandhan accounts, many pro-farmer operations like direct benefits and fast changeover to digitals have increased banking costs and losses in addition to the poor repayment. What the country had started as a show-off to the international window has lead to severe stress and strain on the banking sector.

The banks are losing almost on all operations, including ATM operations and losses due to digital transactions. The only positive is the interest earnings. This too has been cut by the RBI leading the banks to incur losses continuously leading to poorly manned banks and customer services. This apart it hurts depositors hard.

The private sector banks are getting into not so honest operations. At least the recent RBI direction to the country’s largest private sector lender, HDFC Bank, to temporarily halt all its digital launches as well as new sourcing of credit card customers point to a developing serious situation. The step has been taken following various outages the bank faced due to technical glitches in the past two years.

In January 2020, the RBI had levied a fine of Rs 1 crore on HDFC for compromising with KYC norms in 39 accounts, which were used for bidding initial public offering (IPO), somewhat reminiscent of the Harshad Mehta stock scam. Transactions carried out through these accounts were found to be disproportionate the declared income of the customers.

As lending rates are reduced, the bankers get into stress and private bankers apparently indulge in not so ethical practices prescribed by the SEBI. Low lending rates on daily basis facilitate immoral practices at virtually no cost. The public sector banks slip into losses and it is tried to be covered up through mergers. Whether it disguises many critical crises or not are matters of probe.

In such situation, how could all the six members of the Monetary Policy Committee unanimously vote is beyond comprehension. It should have ensued a proper discussion and not decided to continue with the accommodative stance of monetary policy as long as necessary — at least through the current financial year and into the next year — to revive growth on a durable basis and mitigate the impact of  COVID-19, while ensuring that inflation remains within the target going forward. They know it well that for the next one year the chance of remaining it contained is virtually not possible.

The RBI must have its own assessment but it should have listened to the Moody’s Investors Service warnings about the banking sector in Asia and particularly in India. It warns of fall in investments in India and Sri Lanka affecting the capacity of banks to extend loans. Moody’s predict Indian banks having higher NPAs to affect operational capacity. The Fitch rating agency says consumer spending to reduce by 12.6 per cent. The S&P also does not project a very promising picture.

The grimness is denoted by the RBI Governor informing commercial and co-operative banks to not give out dividends this year and retain all the profits. The Governor adds that the RBI would introduce risk-based internal audits in large urban co-op banks. It means that the regulator is not oblivious of the developing crisis. But it is difficult to comprehend why it is soft on prescription or pressures on it.

It may be recalled that recently former RBI Governor Rahguram Rajan and former Deputy Governor Viral Acharya gave strong warning on the health of the banks and they also expressed fears that the regulator could succumb to pressures. The RBI has over decades remained a strong autonomous institution. This had helped the country pass through many crises. It needs to remember its past to remain on the right track. It still has time to initiate strong measures. The first would be to harden rates to save the banking sector and put the economy on track.

 

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Shivaji Sarkar | INFA

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