BREAKINGVIEWS-India's banks stuck in a monetary trap

Wed Mar 20, 2013 1:40pm IST

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By Andy Mukherjee

SINGAPORE, March 20 (Reuters Breakingviews) - India's banks are stuck in a monetary trap. The Reserve Bank of India's interest rate cut on March 19 should enable them to offer cheaper loans to customers, helping spur the economy. Instead, they have little choice but to keep the benefit for themselves.

Banks need all the income they can get to keep depositors. Growth in savings is already failing to keep pace with lending. Deposits have grown an anaemic 14 percent over the past year, according to central bank data. That's below the 17 percent growth in loans, which has slowed down from 20 percent a year earlier.

Not only can't banks pay depositors less on their savings - they ought to be paying more. With inflation at an annual 11 percent in February, small savers earn a real interest rate of minus 4.5 percent on money parked for up to a year at the State Bank of India, the largest state-owned bank. Depositors thus face what amounts to a raid on their savings.

Lenders still make a positive, if diminishing, spread between loans and deposits - 3.4 percent between April and December 2012 for the State Bank. But there are other claims on that margin, like laying aside provisions for bad debts. Net non-performing assets of publicly traded lenders surged to 924 billion rupees ($17 billion) in the quarter ended December 31, a 50 percent jump in just nine months, according to NPAsource.com.

There are two ways out of the trap. One is to address the bad debts, by recapitalising the state-controlled banks. A 140 billion rupee ($2.6 billion) equity infusion was promised in the Feb. 28 budget, but it is far from enough. Even without an increase in bad loans, the government needs to find 1.5 trillion rupees by 2018 to prepare them for the new Basel III bank rules. The other way is to take a firmer grip on consumer prices, so that negative deposit rates turn positive.

With a broken credit channel, it's harder to revive GDP growth, which was just 4.5 percent in the December quarter. Until the banks are working properly, rate cuts from the RBI seem like throwing good money after bad.

CONTEXT NEWS

- The Reserve Bank of India cut its target for overnight interbank rates by a quarter percentage point to 7.5 percent on May 19. Following the latest cut, interest rates have fallen one percentage point in the past year in an economy growing at its slowest pace in almost four years.

- Deposits at Indian banks have grown less than 14 percent in the past year, according to the central bank's data, compared with a 17 percent increase in bank credit. The credit-to-deposit ratio is 78 percent, the highest since at least 2001.

- Reuters: India cuts interest rates, warns of limited room for more easing

- For previous columns by the author, Reuters customers can click on

(Editing by John Foley and Katrina Hamlin)

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

  • Most Popular
  • Most Shared

Popularity Poll

REUTERS SHOWCASE

Record Highs

Record Highs

Nifty touches record high; software stocks gain.  Full Article 

New Adviser

New Adviser

Arvind Subramanian likely to be chief econ adviser.  Full Article 

Pricing Mechanism

Pricing Mechanism

Govt sets up a four-member panel to re-examine gas pricing.  Full Article 

Royalty Rates

Royalty Rates

India to hike iron ore royalty, miners may struggle to pass on extra cost.  Full Article 

Diesel Deregulation

Diesel Deregulation

Oil ministry to seek Cabinet nod on diesel deregulation - sources  Full Article 

Commodities

Commodities

Gold near two-month low; set for weekly drop on interest rate fears  Full Article 

Reuters Exclusive

Reuters Exclusive

Apple iPhone 6 screen snag leaves supply chain scrambling   Full Article 

Helping Regional Mills

Helping Regional Mills

Govt raises sugar import duty to 25 pct from 15 pct.  Full Article 

Curbing Risks

Curbing Risks

RBI to lower ceiling on bank loans to a single corporate group.  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device.  Full Coverage