Cut, cut, cut

The Reserve Bank of India has responded to the international credit crisis by flushing the system with liquidity, and now it8217;s time for banks to follow suit. We are swiftly reaching the point at which banks 8212; public sector banks in particular 8212; will have to make up their mind about lending rates; and, although the head of the country8217;s largest lender, the State Bank of India, said this week that 8220;status quo8221; would be maintained in terms of interest rates, that8217;s not sustainable politically or economically. This is what the RBI is believed to have told nationalised banks, saying that it will ensure that liquidity is not a constraint; this is what

Finance Minister P. Chidambaram told the heads of PSU banks in a meeting on Monday. The economic danger is that PSU banks are stuck in a high-cost, high-rate spiral. Somehow, they need to break out of that curve. No urgency seems on display, however: they are still advertising for deposits at unviably high rates. Given that PSU banks are so dependent on interest income, the high-interest regime has been good to them, and they8217;re reluctant to break out of it. They need to be pushed into it; the current high-interest curve doesn8217;t incentivise them correctly.

Politically, too, there are good reasons to make the change. This has been a bad year for the Indian middle class: inflation will have taken a massive bite out of household budgets. Job losses are a possibility; in any case, annual increments are likely to be lower than they have been these past years of boom. Yes, commodity prices have fallen 8212; particularly fuel 8212; but here the government8217;s reluctance to cut pump prices is understandable.

Instead, if assuaging middle-class anxiety about the economy is a goal, ensuring continued access to credit 8212; and some relief on high EMIs 8212; is a useful policy instrument. Besides, we are talking here about prime-rate borrowers, those who have taken out loans for their own primary residence, for example. Continued high interest rates would mean that we could start seeing foreclosures. Are we really ready for that? Are we ready, politically and socially, for a situation in which otherwise reliable borrowers find themselves unable to make payments? We almost certainly aren8217;t. And if not, this is the time to push banks into cutting rates.