Despite Rajan’s scolding, banks ‘not ready’ to reduce interest rates

The Reserve Bank of India cheered India Inc when it slashed rates twice in the previous monetary policy review meet. However, contrary to the expectations of both the aam aadmi and India Inc, banks did not lower interest rates.

“The banks are not in a position to lower interest rates right now. The provision for Non Performing Assets (NPA) in the balance sheets have been increasing,” said CH Venkatchalam, general secretary of All India Bank Employee Association.

He explained that because of rising bad loans, the profits of the bank will go down. “The bad loans have gone up and hence banks have to provide more. It would be unviable for them to lower interest rates in the near future. In fact the banks may increase interest on the deposits,” added Venkatchalam.

Expressing his displeasure over the banks’ refusal to lower interest rates, Rana Kapoor, president of industry body ASSOCHAM stated that with the ‘ball was in the courts of the bank’.

“However, it is quite clear from the policy statement that the RBI is not happy with the banks not transmitting earlier two consecutive reductions in the short-term interest rates by way of slashing the Repo. It is up to the banks now to respond to the nudge given by the RBI,” elaborated Kapoor.

It should be noted that the RBI has kept the key policy rates unchanged in the first bi-monthly policy review meet today. The apex bank has maintained the repo rate at 7.5% and the CRR at 4% respectively.

“With the RBI choosing not to reduce the policy interest rates, demand revival in the economy and pick up in the investment cycle would remain a tall order,” he asserted.

However, market analysts are of a different view. Treading cautiously in the market, analysts do not expect any further rate cuts from the RBI. “With the unseasonal rains affecting the crops of the season, there is a possibility of a sharp hike in the food prices. There is also the uncertainty over the falling oil prices and Federal Reserve's decision on the US interest rates. Keeping above facts in the concern, we may not see any further rate cuts, as RBI may wait for some time for upcoming macroeconomic data,” said Rohit Gadia, CEO of CapitalVia.