The Reserve Bank of India (RBI) maintained the status quo by keeping the policy rates unchanged at the policy review held on Tuesday. One view of the industry was that a rate cut would have improved the operating profits of businesses, which would have led to a comfortable debt servicing position. However, the substance in the argument is very thin since in many cases of reduction, the benefit was not passed on to the business entities.
Without a rate cut, banks are able to reduce the rate of interest since a reduction in avoidable expenses will improve their operating profits. Growing stressed assets and non-performing assets (NPAs) need to be arrested to improve the banks' profitability and capital adequacy.
The proposed plan to amend the SARFAESI Act will also be a boon for the banking sector. The recovery of written-off loans and huge NPAs will push the industry for a reduction in the interest rates and banks need not depend solely on the change in RBI's policy rates.
V S K Pillai Kottayam
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