Ashima Goyal believes that banks tend to offer better interest rates for bulk corporate deposits that are not sticky.
Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) external member, Ashima Goyal, believes that banks tend to offer better interest rates for bulk corporate deposits that are not sticky. Goyal tells Piyush Shukla that lenders need to make interest rates more attractive for retail customers since they provide bulk of long-term liquidity. Excerpts:
Deposit growth may continue lagging credit growth in FY25. How can banks tackle this?
Banks have to make deposits more attractive for their customers. They tend to raise rates more for bulk corporate deposits that are quick to move to the best opportunity while neglecting retail deposits that provide the bulk of bank long-term liquidity. But depositors also have other investment avenues and transaction costs of shifting are falling. Since loan rates are also competitive banks have to increase efficiencies to remain profitable with lower net interest margins.
In the MPC meeting, you noted that easing of credit growth in certain sectors is desirable. Which segments look worrisome?
Very sharp rates of credit growth carry risks, since assessment and credit quality maybe compromised. Credit card loans have been growing above 30% year-on-year (YoY) but momentum is slowing with prudential tightening. Overall, non-financial sector credit to GDP ratios in India are below 200 while the emerging market average is above 200 and that of advanced economies is above 300. There is room for credit ratios to rise further, but over-leverage and sudden rise is better avoided.
Which sectors do you see bank credit flowing into in FY25?
Indian household and corporate borrowing are lower compared to averages in our peer group of emerging markets while government borrowing is higher. Therefore, there is a scope to increase enterprises and household’s while continuing fiscal consolidation which creates more space for private borrowing. The investment cycle picking up further after the election will require more credit.
In case of a rate cut in FY25, how soon do you expect banks to pass it on to end customers?
To fresh deposits and loans, transmission can be faster because demand for loans and liquidity is high, as is the competition for both. It takes longer to pass through to outstanding deposits and loans, as rates rise with renewal. But there is substantial transmission through markets also now.
Climate change risks regularly affect food prices and food basket has large contribution in CPI. How does MPC look at it?
Under the flexible inflation targeting mechanism, as expectations get better anchored, the monetary policy committee can look through the transient supply shocks as they do not have persistent effects on inflation. We had this experience last year too. Moreover, the weight of food in consumption itself is falling, and food consumption is becoming more diversified, which will reduce the impact and size of future food price shocks.
With fresh wars brewing in the Middle-East, what measures are needed to ensure inflation moderates to 4% target?
What we are doing is adequate since the moderation is happening steadily despite global shocks. Tensions in the Middle-East seem to be subsiding again.
Source:financialexpress.com