We should not tinker with the structure of the financial system and the government will look at further reforms when things return to normal, Rajkiran Rai G, the newly-elected chairman of Indian Banks’ Association (IBA) and managing director and chief executive of Union Bank, tells Abhijit Lele. Edited excerpts:
We have entered the second half of the financial year, often described as busy season. What is your assessment of demand for credit?
Credit demand is expected to be much better in the second half (October 2020-March 2021). Actually, if you look at the first half overall, except for two-three months of lockdown, sanctions were substantial. But, utilisation of working capital has been quite low. We expect (working capital demand) to pick up. Credit is growing at five-six per cent (year-on-year) now. We might see slight improvement to about eight-nine per cent by March. That is my view.
Where do you see interest rates headed?
Interest rates are definitely going downwards. The abundant liquidity in the system is pushing rates down. So whether Reserve Bank of India (RBI) cuts rates or not, they are going down. RBI has given a fair projection of inflation.
Deposits are growing at over 10 per cent and credit is not growing. Plus, there is surplus money in the system and roughly Rs 3-4 trillion is getting into reverse repo operations daily at 3.35 per cent. So, banks will be compelled to lend. There is huge competition to lend at very low rates.
While bank funding is important to keep the economy going, what does the government have to do? Is time running out on an economy-wide stimulus plan?
The government can definitely create demand. We always look at demand creation in the economy through government initiatives. The government is taking steps for this, but there are limitations. Tax collections are low. The government is spending very prudently and is working to keep fiscal discipline.
If you look at high frequency indicators like GST, e-way bill generation, and truck movements, they are showing that the economy is moving close to normal. We need to watch this festive season, particularly October and November. We are likely to be very close to normal by this quarter’s end.
The government can selectively intervene in sectors that are weak. A general push might not be required because things seem to be returning to normal without intervention. All the initiatives taken, like the credit guarantee scheme to MSMEs, are showing effect. Most of the auto companies are back in operations.
There is thrust on reforms in public sector financial companies. What are the areas on which public sector banks need to work?
The reforms have occurred at a fast pace in the past three-four years — like amalgamation of banks and cleaning of balance sheets. The economy needs all the support and the banking system is playing a very active role in this.
At this point, we should not be tinkering with the structure of the financial system and the government will look at further reforms when things are back to normal.
Has the time come for moving government stake in banks to a holding entity?
The Nayak committee made many good recommendations. So, let us not stick to one set of recommendations. We can look at other alternatives. It is not good for us to speculate on which model is good.
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