Time for banks to press on

Cashing in on the stable sociopolitical ecosystem will add to the growth potential of the banking system

By Author Dr K Srinivasa Rao   |   Published: 10th Jun 2019   12:15 am Updated: 9th Jun 2019   10:41 pm

Against the backdrop of GDP growth dipping to a low of 5.8% in Q4 of FY19, an interest rate cut seemed inevitable. Accordingly, in its second bi-monthly Monetary Policy review, the Reserve Bank of India cut repo rate by 25 basis points bringing it down to 5.75%, the lowest since 2010. Consequently, reverse repo rate too has been reset down to 5.5%.

This is the third successive rate cut working out to 75 basis points since February 2019. But more significant than the repo rate cut is the change in the stance of monetary policy from ‘calibrated tightening’ to ‘neutral’ and now to ‘accommodative’, reflecting the flexibility of the RBI to help stimulate growth. Such an industry-friendly policy approach opens up potential future rate cuts depending on macroeconomic developments. With the average GDP growth for 2018-19 moderating to 6.8%, the performance of Q4 may be considered as an aberration that will recoup in the next 2-3 quarters.

However, the RBI revised its GDP outlook for the current fiscal to 7% from 7.2%. The GDP is expected to be in the range of 6.4-6.7% for H1 of this fiscal and 7.2-7.5% for H2. The World Bank is more optimistic and estimates GDP at 7.5% for 2019-20. Similarly, the CPI inflation is within the comfort zone of the RBI — estimated to be 3-3.1% during H1and 3.5–3.7% for H2. It is also notable that the CPI inflation, excluding food and fuel, too fell to 4.5% in April from 5.1% in March.

External Sector

With increasing interconnectedness, the external sector will impact the domestic economy. With continuing geopolitical tensions and trade war between the US and China, the global economy could not sustain the improved performance of Q1 of 2019 and lost pace in trade and manufacturing. Leading indicators point to a further slowdown in Europe and other advanced economies. The UK is clouded by uncertainty over Brexit. Economic activity in many emerging markets has slowed with weakening industrial production and retail sales. Signs of a slowdown are also seen in Russia, South Africa and Brazil.

Though there may not be any immediate impact of the loss of US withdrawal of Generalised System of Preferences (GSP) from June 5, exports will eventually be hurt. However, in the midst of continuing overseas confidence, net inflows of overseas funds have accelerated India’s foreign exchange reserves which stood at $421.9 billion on May 31, 2019. Further risks are imminent with crude oil volatility due to the stance of Opec. Diplomatic initiatives to restore semblance to the external sector are essential owing to the cascading impact of the global economy on the Indian economy.

Domestic Economy

The rate cut would provide some respite to spur private final consumption expenditure and revive sagging gross fixed capital formation that declined to 3.6% after remaining in double-digits in the last five quarters. The worry comes from the supply side — agriculture and allied activities contracted in Q4 due to a decline in rabi production though foodgrain production at 283.4 million tonnes for 2018-19 is a fraction low by 0.6%. Some comfort could be drawn from the IMD outlook of near normal southwest monsoon rainfall estimated at 96%.

Manufacturing too weakened sharply to 3.1% from 6.4% in the previous quarter. The marginal fall in the service sector growth from 51 in April to 50.2 in May 2019 may be a temporary phenomenon. Looking at the formidable challenges, the government has set up two apex committees — a five-member committee to revive investment and growth and a ten-member committee on employment and skill development. They should be able to articulate a policy framework to put the economy back on the fast track.

Supportive Action

Financial markets continue to be under stress due to the liquidity mess and debt fund defaults caused by some of NBFCs. They are to be rescued to prevent further collateral damage but the RBI did not provide specific liquidity window. Rather, it increased the rigour of surveillance on the NBFCs imposing fresh heightened regulations to improve their risk management architecture.

Coming to policies of expansion, based on the experience of issuing the first lot of 10 licences to Small Finance Banks (SFBs), the RBI is set to increase competition in the banking space by making licences to SFBs available ‘on-tap’ after issuing draft guidelines in August 2019. More time is needed for payments banks to get such a facility.

Taking a cue from the Nandan Nilekani committee on digital payments, the RBI has withdrawn minimum remittance charges on Real Time Gross Settlement system and National Electronic Funds Transfer to encourage digital transmission of funds. It has also set up a committee led by the CEO, Indian Banks’ Association to look into the whole gamut of ATM Interchange Fee Structure that impacts the costing of banks and limits their free usage.

The onus is on banks to pass on the benefit to the industry by quick transmission of interest rates. Despite the 75 basis points cut in repo rate in the last 4-5 months, many banks cut their lending rates symbolically by just a few basis points. The SBI has already linked its savings bank interest rates on balances of above Rs 1 lakh to repo rate and certain short-term facilities. Despite a new wave of bad loans in Q1 of 2019-20 and RBI guidelines awaited after the Supreme Court quashed its circular of February 12, 2018, banks will have to enhance their role.

The truncated role of NBFCs following recent defaults may add to the credit deficit. The annualised bank loan growth at 13% (May 10, 2019) needs to be further stepped up to spur growth. It is time for banks to act to stimulate the demand for credit and finance the potential growth to revive the economy. Cashing in on the emerging opportunities in a stable sociopolitical ecosystem will add to the growth potential of the banking system.

(The author is Director, National Institute of Banking Studies and Corporate Management, Noida)