Bankers may urge RBI not to hike rates

Bankers are likely to urge the Reserve Bank not to hike its key-rates and mandatory cash requirement in its April-policy, as they fear that this would affect their liquidity, resulting in a sharp surge in lending rates.

Besides this, concerns of further rise in bad loans in certain sectors like small and medium enterprises (SMEs) are also likely to top the agenda when bank chiefs meet the Reserve Bank Governor D Subbarao on Monday ahead of the annual policy on April 20.

"Bankers are likely to request the Reserve Bank not to hike interest rates further in April as this could directly impact their liquidity position leading to a sharp rise in lending rates," State-run Uco Bank's Chairman and Managing Director, S K Goel told PTI.

Also, bankers are likely to ask the central bank to relax NPA norms in sectors, which were directly hit by the financial slowdown.

"Bankers may raise concerns on rising level of bad loans in certain sectors like small and medium enterprises and exports. They may request RBI to be 'more liberal in NPA norms in certain sectors like SME and export-related segments', Goel said.

According to Goel, the RBI is expected to hike its short-term rates (repo, reverse repo) by 0.25-0.5 percent in its April policy and the cash reserve ratio (banks mandatory deposits with RBI) by upto 0.5 per cent.

"Although the current liquidity conditions in the system is somewhat sufficient for lending, this may not be the case in the approaching months when the Government borrows from the market and if RBI further tightens the liquidity," a top IBA official said.

Amongst other things, bankers are also likely to raise the issue of meeting the higher loan provision norms. The RBI had mandated banks to attain 70 per cent loan loss coverage ratio by September 2010.

"Some banks may find it difficult to meet the 70 per cent ratio within the given time. There is a chance that the Reserve Bank may handle this issue on a case by case basis and may extend the deadline for select banks," the official said.

The RBI, as part of its stimulus exit, hiked the CRR by 0.75 per cent to 5.75 per cent in January and recently hiked its short term rates by 0.25 per cent each putting an upward pressure on lending rates.

Rising loan defaults is a major concern in the industry, especially in sensitive sectors like textile, SME and gem and jewellery as companies in these sectors are yet to come out of the impact of global financial crisis.

In a bid to give a relief to banks lending to infrastructure sector, the RBI had recently eased norms on asset classification in infrastructure and projects, which is expected to help lenders control their bad loans.