Do you still think bankers indulge in what you once called "lazy banking"?
The situation has changed over the past three years. Industrial growth has picked up and with the interest rates declining, there has been an all round growth in overall demand for credit from all sectors. Banks are responding to this. It also happened that the yield on government securities rose after early 2004, and now seems to be stabilising at a certain level.
This appears to have dampened the demand for government securities from banks while they are busy extending credit. I still feel that banks are not doing enough to seek out good credit quality in small and medium enterprises and for rural activities.
How about loan rates? Are the borrowers getting money cheap?
The average loan rate has come down. At the same time, banks' non-performing assets have come down, providing less of a drag on cost of credit and their financial health has improved. To some extent, banks' net interest rate margins have also come down. This is also a result of intense competition.
As the banks become more efficient and IT platforms are put in place to aid proper risk management systems along with good credit histories of the borrowers, the scope for reduction of rates will increase.
The important thing to note is that the new entrepreneurs and the small and medium enterprises today must have better access to bank credit as large corporations are raising money directly from the markets, both domestically and abroad.
What's your outlook on interest rates?
Globally, at present there is no set pattern for movements in policy interest rates. The US Federal Reserve has been raising rates in phases, while the central bank of the UK has now actually cut interest rates, and the European central bank has not changed its policy rate in over two years. Hence, it is clear that policy rates are set much more in the specific context of domestic economic conditions and requirements.
Movement in interest rates is also linked to inflation expectations. There appears to have been a secular decline in inflation rates both globally and domestically.
Thus, we observe generally low interest rates worldwide, and in India. In August last year, when the inflation rate touched 8 per cent, there was a great deal of noise. This is a good indication of the decline in inflation expectations in India. One also needs to take into account the structural changes that have been taking place in the economy.
Despite the hike in commodity prices worldwide last year, there has not been any significant impact on the inflation front: with open trade, pricing power of producers has reduced. Further, there is no shortage of liquidity in the financial system.
What are the areas of concern?
Regulators are never comfortable: they are constantly watching. A key area of concern is oil prices and their volatility. It now appears that the current level of oil prices may not be a temporary phenomenon as demand in China, US and India is expected to continue to increase.
So, it is possible that the high level of price could be more permanent than expected earlier, rather than being a merely transient phenomenon. The volatility therefore needs to be watched carefully. Other concerns are global imbalances "" the twin deficit of the US, slow growth of Europe...
Aren't you worried about the rise of stock market indices?
So far, we have not seen any systemic problem. The situation is not alarming. The RBI has already checked individual banks' exposure to capital markets. None of the banks has breached the prescribed regulatory limits.
However, banks have to be vigilant and check whether their corporate borrowers have been using bank funds to play in the market.
What is your assessment of the situation?
Our job is to ensure that there is no systemic problem and contagion, particularly with reference to the government securities market, the money market and forex market. We are keeping a close tab on banks' exposure to stock markets. We
are in touch with other regulators "" Securities and Exchange Board of India and Insurance Regulatory and Development Authority of India "" and are closely monitoring banks' exposure to non-banking finance companies, and co-operative banks' exposures to some borrowers.
The focus is on the "know your customer" norms. Such norms also need to be applied to "know your investor" to ascertain the quality of the foreign funds flow into the market. We need to ensure overall financial stability.
A general issue that has arisen in recent years internationally is that with inflation being kept under check through globalisation in the real sector, we seem to observe more instances of asset price inflation.
There has been a phenomenal growth in retail assets. Do you sense an asset bubble?
You need to look at this against the backdrop of overall income growth. As people become better off, they tend to spend more on consumer durables, housing, and the like.
So, we need to take cognizance of the overall economic trend and see whether the growth is normal or not. Given the stage of our development and the pattern of household income growth, we can expect the demand for both consumer durables and housing to grow much faster than per capita income growth for the foreseeable future.
Hence, we can expect high growth in both retail and housing finance. At the same time, when credit grows fast in any segment, the probability of deterioration in credit quality tends to become higher. So we need to be vigilant. This is why we have put a higher risk weightage on housing loans and real estate loans.
