While expressing my views on the idea of introduction of Base rate contemplated and suggested by RBI a few months ago before bankers to replace existing PLR or BPLR I had opined that it will be better for government to introduce Uniform Interest rate structure on deposits and advances to avoid unwarranted and unhealthy competition on interest rate as also to avoid stoppable transfer of borrower account from one bank to other bank and to avoid cases of account becoming NPA only due to higher rate of interest .
I would like to refer to news item published in leading newspaper on 11th December 2009 wherein similar suggestion has been given by RBI deputy governor Usha Thorat and IBA is now planning to introduce uniform rate for all home loans borrowers (to start with) so that the difference in floating interest rates among old and new home loan customers may be done away with. There is no doubt that the same step will have to be taken for other loans sooner or later. It is true that in the reformation era government is not considering it fit now to meddle with interest rate charged by banks because they themselves have given freedom to banks to plan and execute their own rate structure.
Similarly RBI governor has also pointed out that there is sharp increase from 26% to 41% in short-term deposit at banks, which invariably causes asset liability mismatch. Such short time term deposit are most likely to switch over to post offices and private companies who offer better rates and thus banks will be left with high cost deposits which they mobilized a year ago or before for long term. Overall cost of residual fund will go up whereas government in all its meeting with bankers ha been putting stress on lowering of lending rates.
To add fuel to fire banks will have to offer higher rates on deposits when they start facing liquidity crisis aggravated by hike in CRR and SLR likely to be announced by RBI in the next quarter when pain of global economic crisis subsides. Obviously for attaining stable cost of fund banks have to stop interest war among themselves and RBI has to reintroduce policy of uniform interest rate as was prevalent in pre-reformation era .As soon as banks arrive at a position when cost of fund is known and predictable for a considerably long period, banks will be in a position to frame their long term lending policy which will be non-discriminatory, appropriate and justified. Further there will not be any fear of liquidity crisis, which often crops up now-a-days due to large-scale exodus of deposits from banks. It is good luck for banks that RBI during trailing twelve months released huge cash by reducing CRR to combat global economic crisis.
Further to strengthen liquidity and to maintain proper asset liability combination government has to ensure that money lent by banks come back as per repayment schedule set by lending banks. For this purpose borrower must have a sense of fear in mind that if they default in repayment as per terms of credit they will have to face serious legal consequences. If it so happens I hope even bankers will not hesitate in taking credit decisions fastly and aggressively even under poor manpower at branches and there is no doubt that RBI will be able to achieve lending target maintaining quality of credit in particular and health of banks in general. IN such position banks will concentrate not in managing interest rate or asset liability mismatch but in creasing their deposit and advance portfolio by extending better and better fast service.
Danendra Jain
11th December 2009
CAclubindia
