In view of rising deposit rates after the Reserve Bank of India announced a hike in repo rate*, bankers fear a pressure on lending rates, including in farm sector, for which the government has mandated Rs 104,500 crore (Rs 1,045 billion) lending this fiscal.
Already, many banks have upwardly revised their deposit and benchmark prime lending rates and in such a scenario for how long can farm-lending rates be 'administered,' they said.
Although excess liquidity in the banking sector has been cited as 'a cushioning factor for the banks not to react in a knee-jerk, fashion' they said the liquidity overhang could taper off sooner than later.
"The pressure has started building up (due to increase in deposit rates) and moreover, there is an expected excess credit demand not only from agriculture but also from industrial sector," a top official of a PSU bank said.
With the RBI 'substantially' axing interest rate on the repo balances held with it, though there are increased prospects for lending, bankers admit they would rather be 'doubly' cautious due to the additional responsibilities that could be thrust on them due to the proposed Lenders' Liability Act.
At present, interest on repo balances held with the RBI would get only 3 per cent, while lending on an average could fetch 8.5 per cent (agriculture loans).
This differential (or the premium) seems not to gel well with the risks involved due to the proposed legislations like lenders liability code, the banking sources said.
"If they (banks) fail to show sufficient concerns to customers, there will soon be a clamour for enacting a law. It may be difficult to deny such a demand indefinitely," the finance minister had said in reference to lenders' liability.
As long as 'insatiable' elements are in the society, the bankers said a foolproof system in tackling the bad loans was a near impossibility and the second-best option would be to create an enabling environment to minimise the non-performing assets.
"But instead of chasing defaulters and bringing them to book, if the system imposes additional responsibilities like lenders liability, which bank could ensure a hassle-free and smooth credit process," they said, adding that it was more true for the state-owned banks.
In the case of non-wilful defaulters, one can understand the logic and the banks have always come one step forward for restructuring the debt, banker said.
"But in many extreme cases of wilful defaults, it is more like begging by banks in front of the loan takers, especially when the cases have gone to Debt Recovery Tribunals," they added.
Unlike private sector banks, PSBs cannot engage any outside 'agents' to recover bad loans forcefully and whatever settlements had taken place, it always had an effect on the financials, they said.
Referring to the Securtisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, the bankers said the initial fear psychosis had been given away when there was dilution in the Act.
Since any strengthening of the Act needs time consuming Parliamentary nod, banks are virtually being forced to work under duress, they said.
*Repo rate: Repurchase agreements or ready forward deals, a secured short-term -- usually 15-day -- loan by one bank to another against government securities. Legally, the borrower sells the securities to the lending bank for cash, with the stipulation that at the end of the borrowing term it will buy back the securities at a slightly higher price, the difference in price representing the interest.
