Last November’s Demonetisation move created high expectations of low business loan interest rates. This expectation hasn’t been fulfilled and interest rates may remain static for a while to come.
One of the beneficial outcomes of Demonetisation was the mobilisation of deposits. Rs 14 lakh crores was deposited into the banking system. This liquidity rush was expected to help banks lower lending rates because a) their cost base had been lowered – the surge in liquidity brought down deposit rates by anywhere between 80 and 200 bps across tenures (100 bps is 1%); and b) there was more money available to lend out. Moreover, everyone expected RBI to aggressively cut policy interest rate cuts to stimulate the economy after the Demonetisation shock.
A series of events and circumstances have since combined to keep interest rates where they are.
The first disappointment for borrowers came as RBI unexpectedly held rates level in December 2016. This was due to uncertainty over demonetisation’s impact, the US Fed’s stance on interest rates there, and stubborn inflation due to rising fuel prices.
In its last policy statement too, the RBI warned that inflation is a concern. Accordingly, policy rates were (yet again) held level. The concerns that worry RBI include high oil prices, geo-political risks, drought-like conditions in South India, concerns over the 2017 South-West Monsoon, and the expected inflationary impact of GST.
Bank asset quality problems:
Apart from policy rates, the other reason for high lending rates is that banks are struggling with their bad loans. Many of these stressed borrowers are also seeing decline in operating margins. Even though most of this problem comes from large corporates, small businesses may also suffer from poor perception. There is also a feeling that smaller businesses will struggle to recover from demonetisation’s shock and that they will also be hit harder by GST’s implementation.
Banks don’t have enough capital:
Having lots of deposits does not mean that a bank can make lots of company loans. The amount a bank can lend depends on the amount of its capital. The large loan write-offs and provisions that banks have taken over the last couple of years have left many of them with low capital adequacy. This reduces their ability to lend money. Public Sector Banks, which are in dire need of capital, are unlikely to receive much government funds.
There is one partial offset to these factors. Credit growth, or the rate at which borrowing grows, is anaemic. The pre-2008 growth rates of 35% and even the average 15%+ growth post-2008 are history. Credit growth currently stands at ~3%. Within this, corporate and SME credit growth rates, both of which have been continuously weak, stand at 0% and 0.4%! Capital Finance, Working Capital Loans, Mortgage Loans, Trade Finance……growth in every category has slowed to a standstill. At some point banks should tire of this lack of business growth and lower lending rates just to get companies to borrow.
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