Economic
Highlight
New Delhi, 7 December 2020
Low Interest Rates
NO GOOD FOR BANKS,
ECONOMY
By Shivaji Sarkar
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 inflation figures,
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. ---INFA
(Copyright,
India New & Feature Alliance)
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