RUN–UP TO THE CREDIT POLICY

PHD CHAMBER PITCHES FOR LOWERING OF INTEREST RATES

Backed by significant shrinkage in the bank credit – Rs.14,386 crore since April this fiscal year- the forthcoming Credit Policy to be announced by the Reserve Bank of India (RBI) on July 31, 2007 should send a clear message to the banks to reduce the rate of interest, says the PHD Chamber.

“All macro economic variables like inflation, foreign exchange reserves etc. are positively poised for an interest cut to boost the economic activities. A tight money policy pursued beyond its relevance will have adverse impact on the economy, particularly on the tempo of investment,” says Mr Sanjay Bhatia, President, PHD Chamber.

An analysis made by the PHD Chamber revealed that Small and Medium Enterprises (SMEs) and households are mostly hit by an upwardly moving interest regime. While the large corporations can resort to External Commercial Borrowing (ECBs), IPOs, access to credit at lower interest rate interest due to higher credit ratings, issuance of commercial papers to tie down the fund requirements etc, SMEs are not left with any viable funding alternatives other than borrowing from the institutional sources to meet their financial requirements. Therefore, the upward moving interest rates and the squeeze in credit are making their projects unviable. “There is clearly a lack of level-playing- field between large and small corporations as far as the cost of funds are concerned and it should be immediately addressed to,” says Mr Bhatia.  What is more, industry operating on low margins and with high investment programmes continue to be vulnerable.

The household sector, because of the rising interest, are forced to pay either higher EMIs or extend their length of payment period, is an affected lot. In the medium term, this will spell a lot of difficulties to this section, who are mostly salaried or fixed income yield people. Mortgage interest rates, which are ruling in a band of 12 and 14 per cent have exerted mounting pressure on the common man. The forthcoming credit policy should bring some cheer to this section.

In order to buttress the impact of the rising value of rupee vis-a-vis the dollar, the Finance Ministry has announced some sops to the exporters. The relief has mitigated the problems only partly. Even now, the interest rates and consequent transaction cost of the exporters are relatively high as compared to major competitors. The credit policy should address to these issues by rolling back some of the increases in interest rates effected in the past. Equally significant is the fact that rupee-dollar exchange rate will, by and large, remain the same in the coming months. Therefore, export competitiveness can be achieved only by reducing the transaction cost in the coming months.

PHD Chamber is also of the opinion that the non-oil imports of the country (mostly capital goods) have gone up significantly despite hardening of the rupee. That signifies the pent-up import demand across industry segments for expansion and modernization. Corporations, across the spectrum - require huge funds for funding such activities. Cost effective and timely access to such funds will be possible only by softening of interest rates