Continuing financial sector uncertainty a concern for industry and trade: PHD Chamber

Continuing tightening of the monetary policy by the Reserve Bank of India is a matter of concern for the industry and trade in the country. In a short span of about three months, RBI has hiked for the fifth time CRR to a level of 9%, a hike of 25 basis points with effect from 30 August 2008, which may result in further reduction of liquidity from the banking system to the extent of Rs.20,000 crore.  The repo rate has also been increased from 7.75% as on 26 April 2008 to 9% with immediate effect. The repo rate has been increased by 50 basis points on 29 July 2008. The benchmark prime lending rate of PSBs and private sector banks have increased to 12.75-14 per cent and 13.50–17.25 per cent respectively in July 2008 as compared with 12.25–13.50 per cent and 13.00 – 16.50 percent in March 2008 due to measures taken by RBI earlier. The hike in CRR and repo rate announced on 29 July 2008 is bound to further raise the BPLR of the commercial banks in India, making credit more costly for the industry and trade.

Dr. L K Malhotra, President, PHD Chamber has expressed apprehensions regarding future growth rate in the industry, overall corporate sector financial situation, capacity utilization, profit margins and employment. Growth in industrial output that slowed to 5% during April – May 2008, as compared to 10.9 percent in April-May 2007, may further decline. This is bound to slow down the growth rate of GDP. Moderation in economic activity may impact expansion of new jobs and even lead to lay offs in certain sectors. Dr. Malhotra has emphasized that the tight monetary policy pursued especially since April 2008 has not delivered much in terms of lowering the rate of inflation which is currently estimated at 11.89%.

PHD Chamber has also expressed concern over the likely impact of tight monetary measures on agricultural loans raised by farmers. Though short term agricultural loans are to be disbursed at 7% per annum by the commercial banks, borrowing costs on other agricultural loans is linked to the prime lending rates of the commercial banks. Thus the cost of long term agricultural loans may go up, with increase in PLR. At a time when there is urgency to increase production of agricultural commodities in order to feed the growing population and to tame the rising inflation, this move may act contrary as it may delay or cut down large agricultural investments and hence, the production of sustainable marketable surplus.

PHD Chamber has expressed concern over the disturbing trend of declining credit flow to Micro and Small Enterprises from 14.2% of Net Bank Credit in 2001 to 8% in 2007. PHD Chamber has therefore reiterated that since loans to small scale industries are also pegged to prime lending rates of banks, a rate hike would make loans to SSI sector dearer and act as a further blow to the flow of adequate credit to the small scale industries by the banks.

According to PHD Chamber, as the bank rates are increasing, default rates might also go up. This may add to NPAs of the banks.