RBI may consider bank rate cut

Expressing concern over the rigid interest structure in the system, the RBI governor said that there was a strong case of reducing the interest rates considering the low rate of inflation and comfortable liquidity conditions.

"There would be a case therefore, given that inflation is low, the business cycle is on a growth path, that we have a reduction in interest rates," Jalan said while addressing a FICCI conference.

However, this may not be possible in the immediate future since about two-third of savings in the banking system isblocked for longer terms at higher interest rates and this caused inflexibility in the deposit as well as lending rate structures. FICCI president GP Goenka had proposed a two per cent cut in interest rates on Wednesday. "We are trying to make the interest rate structure more flexible," Jalan told reporters. The markets have been hoping the RBI will trigger a cut in banking rates by announcing a reduction either in the bank rate or the cash reserve ratio following the government’s decision to cut rates on public savings last month.

Market players took the RBI governor’s statement as an indication and are expecting an interest rates cut in near future, dealers said. The government reduced interest rates on PPF and post office savings schemes by 100 basis points from January 15. When asked whether the central bank would lower interest rates following the government’s signal, Jalan said: "It is for the banks to decide".

“The interest rate rigidity in the Indian banking system is hampering the growth ofcredit to the corporate sector,” Jalan said, adding, “Deposit cost in the system is governed by an overhang of deposits of longer-term maturities, therefore, the banking system is less well functioning than it should be.”

“There is ample room for growing financial savings in the banking system as currently they constitute only 10 per cent of domestic savings rate of 25 per cent of national income,” Jalan said while addressing the FICCI meet on banking sector reforms.

On reforms in the banking sector, Jalan said it could not take place in isolation and had necessarily to encompass other legs of financial sector like the capital, debt, bond, money and foreign exchange markets. After the recent South-East Asian currency crisis, he observed, the banking system had received greater attention from the world over and the country’s financial sector stands out to be one of the safer destination for investors. He asked the captains of industry to find out the reason as to why the public do not have muchconfidence in their entities while investing their money.

IBA chairman for winding up BIFR
MUMBAI: THE Indian Banks’ Association chairman A T Pannirselvam today called for winding up of the Board for Industrial and Financial Reconstruction as it was not helpful in banks’ efforts to recover bad loans.

In a scathing attack on BIFR, he said, the board alone could draw the efforts of banks to recover debts. “The BIFR needs winding up,” the IBA chief emphasised at a conference on banking sector reforms organised by FICCI. Selvam, chairman of Union Bank of India, predicted that the banking industry in India will face a shake-out due to capital inadequacy and more banks were likely to join the ranks of weak banks. Painting a gloomy picture of the banking scenario in the country, Selvam said “capital inadequacy will bring about a shake-out in the industry and quite a few banks will join the family of weak banks.” Though the banks in the last four years have recovered Rs 35,000 crore of baddebts, the NPAs threaten to burgeon to Rs 100,000 crore in the next few years, he added.