Bankers seek measures to propel credit demand
Last Updated : 03 December 08
Mumbai : Bankers have highlighted the slowing credit demand in retail and corporate portfolios as an emerging challenge to the domestic banking system and sought coordinated steps from the fiscal and monetary sides to tackle the issue.
They said the Reserve Bank was likely to introduce a set of measures to propel growth in export-oriented sectors and stimulate demand, which might include a further 0.5-1 per cent cut in the cash reserve ratio (CRR) and repo rates in the near term.
"Credit demand has declined significantly in many sectors because of the economic slowdown. There is a need to revive the demand," Kotak Mahindra Bank's Head of Liabilities, K V S Manian said.
A further cut in CRR could bring down the lending rates of private sector banks, which are yet to respond to the latest round of rate cuts announced last month by the central bank unlike their state-owned counterparts, Manian said.
Following a series of rate cuts in the last two months by the RBI, most Government-owned banks had reduced their prime lending rates by 0.75 per cent and deposit rates by up to 0.5 per cent.
"There is a strong possibility of RBI reducing the CRR and repo rate anywhere between 0.5-1 per cent very soon to infuse more money into the system. This would help banks to extend more credit to corporates," Axis Bank's Treasury Head, Partha Mukherjee, said.
A gradual fall in headline inflation and declining crude oil and commodity prices worldwide have given room for the apex bank to shift focus from inflation to growth- supporting measures, bankers said.
Since October, the Reserve Bank cut its CRR by 3.5 per cent to 5.5 per cent and repo rate by 1.5 per cent to 7.5 per cent to infuse liquidity into the banking system after hiking rates earlier this year to control inflation which had spiralled to close to 13 per cent.
Inflation currently stands reduced at 8.84 per cent. CRR is the percentage of amount banks are required park with the central bank. Repo is the rate at which the RBI lends overnight funds to banks.
Private banks are likely to cut their deposit rates if the RBI cuts CRR again which is likely to be followed by a reduction in lending rates as well, Mukherjee said.
IDBI Bank's Chief Financial Officer, R K Bansal, said the liquidity situation was comfortable presently but a further cut in mandatory reserve ratios would help lenders to bring down their cost of funds.
"The cost of funds should come down further. Banks may look at reducing their deposit rates prior to reviewing their lending rates," Bansal said.
Meanwhile, credit demand has slowed down in the recent months on account of increasing stress in various sectors caused by the slowdown in global markets, a top official with Yes Bank said.
According to the official, the lack of credit demand posed a greater challenge than the liquidity situation. "Many sectors including auto, textile and manufacturing, are facing stress due to the global financial crisis. There is a need to stimulate demand through coordinated steps from both the monetary and fiscal sides," the official said. (zeenews)
