Reduce spread between deposit and lending rates to 2 % - PHD Chamber

The spread between the deposit and lending rates should be a maximum of 2 per cent to usher in a healthy and dynamic monetary policy that can ensure credit to industry at internationally competitive rates, according to PHD Chamber.

Expressing grave concern about increasing cost of credit to industry that is eroding the competitiveness, Mr Sanjay Bhatia, President, PHD Chamber said, “the PLR of the banks has been going up steadily and unrealistically. It ranges from 12.5% to 13.5% in the case of public sector banks and is steeper in the case of private banks between 13% and 17.25%. This is quite high when compared to LIBOR/prime rates of other countries.”

Cataloging its wish list for the forthcoming review of the monetary policy, PHD Chamber said that the RBI should reduce CRR in a phased manner from 7.0% to its target of 3%. This will improve the liquidity in the system. The RBI should use flexibility regarding stipulation of holding of liquidity instruments (SLR) by banks to enhance the lendable resources by reducing the floor limit of SLR presently pegged at 25%. These suggestions are well within the guidelines laid down in the case of Basel 11 prudential norms.” Equally significant is an informed debate on the capital adequacy ratio, which some banks maintain at 16 per cent or so leading to lock in of capital resources. Increase in capital adequacy ratio was stipulated at a time when there were apprehensions about some banks on the brink of liquidation on account of mounting non-performing assets. That is history now and we should look forward to have a pragmatic capital adequacy ratio in line with the international norms,” says Mr Bhatia.

RBI may evolve a uniform credit rating code for the banks to follow in determination of credit rating of the borrowers. It should also be made mandatory that credit rating be disclosed to the concerned borrower and based on a holistic assessment. Recently, a number of credit rating agencies have come up. Benchmarks for rating differ from one organization to the other. “ The most affected segment is the SME sector, particularly in the ICT segment. The first generation entrepreneurs, who are in need of funds face a lot of problems in raising funds from the institutional sources. Banks insistence on collaterals is difficult to be complied with by these entrepreneur, who depend on their brain trust to power the enterprise,” says Mr Bhatia.

Banks are charging high pre-payment charges from the corporates who in response to the softening of interest rates are interested in pre-payment of high debt loans obtained from such banks/financial institutions. It is suggested that banks may allow the corporates to retire such high cost borrowings with minimum charges, thereby increasing not only the liquidity of the banks but also reducing the percentage of NPA. There are also hidden clauses in cases where pre-payments are not allowed without penalty. The banks insist on settling a part of the capital borrowed only and the borrower has to keep a year’s EMIs or so live (in the case of housing loans). The argument that pre-payment of loans would adversely affect the investment portfolios of banks and in turn their return on capital is untenable in a dispensation where credit is scarce and there is a proliferation in the ranks of borrowers.

There is a need to enforce the sub limit under priority sector lending for.Micro Small and Medium Enterprises (MSMEs). These units cannot afford to survive with inadequate technology, modest finance and archaic management techniques. The problems faced by the MSMEs not only extend to procurement of finance through equity, term loan or working capital but also stretches to other areas like non-furnishing of collateral/personal guarantee or say depriving of reduction of benefit in interest rates. Major reasons for delays in sanction and disbursal of facilities are the lengthy documentation and legal procedures.

Commercial banks have the freedom to fix interest rate on export credit subject to maximum of BPLR minus 2.5%. Many banks, instead of reducing their BPLR in accordance with market trend continue to have high BPLR, hence, depriving the exporters the benefit of reduction in general rate of interest. It is suggested that banks may prescribe maximum ceiling on export interest rate in absolute term instead of linking the same with BPLR.