Bankers’ body asks RBI to pause on rate hike spree

Bankers have presented a gloomy picture of the economy to the Reserve Bank of India (RBI) at the pre-credit policy meeting so that the central bank would not raise rates in the second quarter review of money policy on July 26.

Bankers were of the view that interest rates have shot up and the investment climate in the country was not conducive to further rate hikes. “Either pause or hike cash reserve ratio (CRR)” is what bankers have requested. CRR is the ratio of deposits banks have to keep with the Reserve Bank of India in cash.

New sanctions are not happening and new proposals from India Inc have drastically reduced, said bankers, including representatives of public sector, private and foreign banks, who attended the meeting.

“Proposals from power companies and other large borrowers are absent this year as many of the projects are stranded due to environment clearances. Steel companies are yet to get mining licences and the 3G requirements that were there last year are absent this year,” said MD Mallya, chairman of Indian Banks Association and Bank of Baroda.

Bankers said non-performing assets were a source of concern with major portion of the stress being seen in the SME portfolio of banks. Defaults in education loans were also part of the discussion along with the formation of the credit guarantee fund for these loans.

“We have told the RBI that all education loans up to Rs 5,00,000 that do need a collateral should be included in the credit guarantee fund,” said an official who was present at the meeting.

Banks have again urged the RBI not to deregulate the savings rate in the context of economic uncertainties and slow credit pickup.

To keep the cost of funds low as most banks have been on a Casa (current account and savings account) drive, banks maintain about 40 to 45 per cent of Casa on their books. These are generally considered to be stable deposits with the rate of interest on these deposits frozen at 3.5 per cent. RBI is of the view that depositors get a raw deal, especially when inflation is much higher, making the returns from savings accounts negative.