Banks pushed to lend cheaper to cos

HE DID everything he possibly could; and yet, interest rates to corporates seemed to defy gravity. Reserve Bank governor Bimal Jalan is now trying to reverse that unhappy state of affairs.

At a time when everything else is favourable and the usual suspects — like inflation — are lying low, Jalan is trying to rectify distortions that bedevil interest rates in the system and defy his attempts to improve credit flow to corporates.

So, he is doing the quintessential central banker thing — trying to talk down interest rates, minus the Big Bang move of a rate cut. Or, induce banks to reduce interest rates on corporate loans without having to cut any benchmark rates.

This then, to a large extent, defines the thrust of the monetary policy for the first half of the year. If signals are anything to go by, the central bank probably feels that benchmark interest rates — such as yields on government securities — might have gone as low as they possibly could.

But they’re not translating into higher credit flow to corporates and that is what Jalan wants to remedy. And, to lubricate this, he has cut CRR by half a point to release an additional Rs 5,000 crore into the system.

Jalan is persuading banks to reduce the interest rate spread between government securities and corporate bonds — by introducing transparency in interest rates as well through a bit of moral suasion. Banks will now have to publish their maximum and minimum lending rates.

The RBI governor has urged banks to lower their spread over the prime lending rate — the rate offered to the most creditworthy — “wherever they are unreasonably high so that credit may be available to the borrowers at reasonable interest rates.�

“But this is not a moral position that I am taking; it is the factual position. Although interest rates on an average has come down, the spreads have increased for many banks. We are urging the banks to publish this information,� said the governor.

And if they don’t agree, he always has that sword dangling over their head: the possibility of a future Bank Rate cut. This is the first time that RBI has announced its intention of lowering BR in future.

“I have shown you my cards...there are no surprises. The ground realities are comfortable..inflation is low, forex reserves are high and markets are stable,� he told the media on Monday afternoon soon after presenting the Monetary and Credit Policy for 2002-03.

To be fair to the banks, he has also made attempts to reduce their cost of funds. The central bank governor has asked banks to encourage depositors to convert their existing long-term fixed rate past deposits into variable rate deposits.

While in a falling rate regime this could lower the fund cost of a bank, it’s another story whether the average depositor used to fixed contractual rates will go for such schemes.

Like the lending rates, banks will have to also disclose deposit rates across various maturities and effective annualised yield to the depositors who can then compare the rates for different banks in the RBI website. These are new disclosure standards which have never been tried before.

Jalan has tried to minimise the risks that lie beneath a placid, liquidity-sloshed money market offering cheap overnight funds.

With several banks borrowing from the overnight call market to lend long or invest in rising gilts, RBI has put caps on lending and borrowings by banks in this market — a move that make life difficult for many banks, but could see the development of a term money market. He is candid that the sluggish credit figures essentially reflect a demand side story.

With large project loans and infrastructure funding yet to show signs of a pick-up, the monetary authority has laid down new rules of the game to ensure that credit flows into other pockets.

Limits for financing different priority sector projects have been raised and banks have been told to exclude funds on-lend to regional rural banks for fulfilling the priority sector target of 40 per cent of advances.

Assuring liquidity, imparting greater interest rate flexibility in the medium term and sustaining a soft bias constitute the basic stance of the monetary policy.

Given this backdrop, the RBI on the back of $55bn of forex reserves has allowed banks to deploy as much as 25 per cent of their Tier I capital in overseas market, tinkered with rates and rules to make export credit and housing loans cheaper, tightened prudential standards to enable banks to move over to the 90-day provisioning norm and told banks to provide capital against market risk in line with the international norms.

Over and above, the credit policy sends out the clear message that a banker’s life will be far more competitive and accountable.