Banks expect 0.5-1% rate hike

The majority of the banking industry expects interest rates to rise by 0.5-1.0 per cent, and it is almost the entire industry's consensus that the highest growth in credit in 55 years, witnessed in 2004-05, is sustainable for another three to five years.

These views were expressed by bankers in a survey conducted by Federation of Indian Chambers of Commerce and Industry (Ficci).

Nearly 96 per cent of the respondents to the survey said the current growth of non-food credit is sustainable for the next three-five years.

About 64 per cent of the participants expected a rise in interest rates going forward. Of them, 74 per cent foresee a 0.5 per cent hike in interest rates, while the remaining 26 per cent expect it to increase by 1 per cent.

Banks pointed out that the rise in interest rates would have an adverse impact on lending to corporates, particularly to AAA-rated borrowers that currently borrow at sub-prime lending rates.

Non-food credit has grown by 11.5 per cent (Rs 92,443 crore) till October 1, 2005, as against an increase of 6 per cent (Rs 41, 034 crore) in the corresponding period of the previous fiscal. Bankers said the current liquidity in the system is enough to meet all the credit needs.

Apart from priority sectors, which are seeing a huge credit flow, the credit flow to large-scale enterprises, too, remains buoyant. The survey states that two-thirds of credit flow in the period under review was due to retail, housing and other priority sector loans.

In order to boost the credit availability to SMEs, bankers recognised targetting the right customer segments as a key factor, followed by a strong distribution platform.

As for lending to the farm sector, the absence of sufficient support systems to farmers was deemed a major hindrance in financing agricultural operations.

Private bankers emphasised the need to relax the prescribed limit of single ownership and cross-holding cap in the ownership and governance guidelines, while multinational players stressed that guidelines laid out for mergers and acquisitions were not in tandem with global parameters.

On the trend of globalisation catching up with Indian banking entities, bankers' general view was that India should enter into more free-trade agreements with other countries, keeping in mind, the available market size and the level of access given to domestic banking entities in these regions.

As many as 95 per cent of the respondents felt that India's Comprehensive Economic Cooperation Agreement with Singapore would not have an adverse impact on the business of other foreign banks present in the country.

WHAT THEY FEEL
Findings of Ficci survey on banks

• 64%: a rise in interest rates
• 62%: rate hike to impact corporate lending
• 88%: autonomy to make PSBS more competitive and profitable
• 75%: PSBs-need to enhance FII limit
• 67%: private banks-relaxation of prescribed limit of single ownership and cross holding cap in pvt banks
• 75% :foreign banks-M&A guidelines not in line with global stds
• 53%: to increase retail portfolio by more than 25% in 2005-06
• 80%: disagreed that housing loans are creating a bubble
• 95%-to increase exposure to microfinance