When slack credit demand pares rates–Economic Times–03.01.2018

The country’s biggest lender reducing lending rates by 30 basis points points to three things: one, the general rule of demand and supply works in the case of loans, as well; the RBI has all along been right in insisting that there is room for banks to lend lower even without policy rates being cut further; and, the government has to step up public investment to revive growth.

State Bank of India, it has been reported, made more money in the first nine months of this financial year from fines on customers whose deposits dipped below the minimum balance requirement than its profits for the second quarter.

The banks are awash with liquidity and the demand for credit is anaemic. So, SBI pared down its deposit rates and has now lowered the lending rate, presumably, to attract fresh borrowers. This is welcome.

Equally welcome is the bank’s savvy move to offer the lower rate to existing borrowers, in contrast to the normal practice of reserving such benefits for new customers.

This should make SBI customers less eager to be tempted by rival offers from other banks. In the new year, the world economy is expected to strengthen, across the board. This should see monetary tightening in the US and Europe and, possibly, even in Japan.

That would make it harder for India’s monetary policy to turn accommodative, for fear of making the dollar efflux, inevitable when the risk-free return in industrial countries goes up, even stronger and putting downward pressure on the rupee. If with no reduction in the repo rate and a prospect of the rate hardening, if anything, the banks’ lending rates go down, it bears out the proposition that banks have the scope to reduce lending rates without additional policy action by the central bank.

Sluggish demand for credit does not speak of rude economic health. Supply of loans will not, by itself, create demand. That has to come from giving stalled investment a push, of the kind the government has promised via its Bharatmala and rail expansions. The government has to get infrastructure investment going, and revive the public-private-partnership mode to that end.
This piece appeared as an editorial opinion in the print edition of The Economic Times.
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