18 Mar 2013, Business Line.
A softening in lending rates will be conducive for kick-starting the investment cycle in the country, according to State Bank of India Chairman Pratip Chaudhuri.
Whichever country has shown rapid growth, particularly in the manufacturing sector, the interest rates were much lower.
“Rates of interest need to come down further. Our base rate is at 9.70 per cent, I would like to see a base rate of something like 9.50 per cent because internationally the rates are so low,” said Chaudhuri.
Base rate is the minimum lending rate below which banks cannot lend. The actual lending rates charged to borrowers by banks are the base rate plus borrower-specific charges, which include product-specific operating costs, credit risk premium and tenor premium. India’s largest bank last pared its base rate from 9.75 per cent to 9.70 per cent on January 30.
SBI nudged its base rate lower a day after the Reserve Bank of India cut both the repo rate and the cash reserve ratio (CRR) to 7.75 per cent (from 8 per cent) and 4 per cent (from 4.25 per cent of deposits), respectively.
Repo rate is the interest rate at which RBI lends short-term money to banks. CRR is the slice of deposits that banks have to park with RBI. Chaudhuri said: “If you are a corporate in India and want to set up a petrochemical plant, you will pay 11 per cent interest rate. But if your competitor in Dubai is setting up a similar petrochemical plant, he will pay an interest rate of 3 or 4 per cent… So, you are uncompetitive from day one.”
The SBI chief said lending rates in the banking system could soften if the central bank cuts key policy rates in its mid-quarter review of monetary policy, which is due on Tuesday.
“Both the CRR and the repo rate should be cut by 50 basis points each. CRR cut is more important as it releases primary liquidity into the banking system.
“Whereas a repo rate cut is more of a signal/an indication (of the direction of interest rates). It is not very material but, yes, the cost of refinance goes down,” said Chaudhuri.
The central bank has underscored that subdued investment activity in the economy has led to the decline of capital goods production. With investment activity remaining subdued, the prospects of a recovery in industrial growth appear weak.
In its latest macroeconomic and monetary developments document, the RBI observed that the emerging slack in investment needs to be addressed. This slack has emerged from a combination of domestic and global factors.
“While global growth may remain slow for some more years as significant fiscal adjustment is needed to overcome the debt overhang in the advanced economies, the domestic growth could respond to the policy (reform) action that has now begun,” it said.