RBI governor Urjit Patel nudges banks to reduce lending rates

Backing the government’s stand that high bad loans are a legacy issue, Reserve Bank of India governor Urjit Patel on Saturday nudged banks to lower lending rates for segments of the economy that did not benefit from recent softening of interest rates.

“The weighted average lending rate reduction has been considerably less, given that we feel that there is some scope for further reduction in lending rates, and if you see that for sectors like housing, personal (loans) etc, the reduction has been much more than for other sectors by the same bank,” Patel said. He said banks have immensely benefited from the influx of low-cost deposits that has come into the system after demonetisation, as well as the amount of reduction in the interest rate (repo rate) undertaken by the RBI. Patel was speaking after the central bank’s board meeting in the capital.

The customary post-Budget meeting was addressed by finance minister Arun Jaitley. The central bank has cut its key interest rate by 175 basis points since January 2015, while the banks are estimated to have lowered lending rates by only 75-80 basis points. In the February 8 monetary policy review, the monetary policy committee (MPC) of RBI retained the key interest rate at 6.25%.

Responding to a question on whether there is a change in stance with regard to retail inflation targeting, Patel said: “The commentary in our monetary policy statement by the MPC was that inflation ex-food and fuel has hardly budged since September and, therefore, if we want a further reduction in headline inflation, it is going to be difficult. It is just a comment.” The MPC has been mandated to maintain retail inflation between 2%-6% till 2021. With regard to high bad loans, Patel said these are mostly on account of credit facility provided for long-gestation projects before 2011-12 (when UPA government was in power). “Therefore, by definition, this proportionate amount is a legacy issue, although the recognition and reporting of these have taken place only recently,” he said. During a debate in Lok Sabha on Thursday, Jaitley had blamed the indiscriminate way loans were extended to big corporates under the UPA government’s watch during the economic boom years of 2003-08 for the twin balance sheet problem festering the economy.

The FM said he expected the RBI to cut the interest rate, but respects its decision to hold status quo. “All finance ministers have a perpetual desire (of lower rate), but at the end of the day, we all respect the decision that the RBI takes,” he said after addressing the customary post-Budget board meeting. On when the RBI will be able to come out with the figures of scrapped notes that have been deposited with the banks, the RBI governor said one has to wait till June 30 to get a verified number.