Straight from the Specialists
(The views expressed in this column are the author’s own and do not represent those of Reuters)
With more than 70 pct of the banking market in the grip of public sector banks (PSBs), who have a combination of constraints to lend freely, the Reserve Bank of India’s policy review amounts to almost a strategic push for these PSBs. Thus, the eagerness with which the policy review is awaited.
With discussions around tightened liquidity, slower credit growth and falling IIP numbers, the RBI is literally between Scylla and Charybdis. How can its policy making contribute to an alignment between growth and inflation? So what would be the reasonable expectations from the policy tomorrow? But before that, two quick observations.
During the peak of the financial crisis in the United States, essentially triggered by sub-prime loans, it was discovered that borrowers would prefer to default on housing loans (mortgages) rather than auto loans. This was due to a crash in the real estate market and the borrower’s not being too uncomfortable living out of a car (caravans included). The impact on banks is well known. Out here, thanks to an underpenetrated mortgages market (therefore a less heated market) and the “emotional value” attached to a house, people would have responded the other way around. Hence, any interest rate change in the policy is immediately “tested” with its impact on home loan borrowing rates. So far the growth in this segment has been steady and without any worrisome stress on asset quality.
(The views expressed in this column are the authors’ own and do not represent those of Reuters)
By Robin Roy and Sanjoy Majumder
Indian banks are facing a dual challenge. Monetary tightening by the RBI is already impacting the banks’ margins and due to an imperfect monetary transmission system, banks are not able to pass off higher lending rates to the borrower across the board.