Interest Rate Policy Of RBI

I praise RBI Governor Mr.  Raghuram Rajan that once again he has proved by action that he is not going to change his idea of keeping interest rate intact in the interest of economic health of the country though he has been facing severe and consistent pressure from politicians and corporate lobby to reduce interest rate . He understands well that any more reduction in interest rate will force banks to reduce rate on deposits which will have bad impact on savings rate and investment capacity of Government of India. It is also made clear that banks have enough liquidity in hand and if they want , they can deliver more and more credit to needy persons and companies. Further by reducing SLR , RBI has given additional liquidity in the hands of banks. 
He has taken a good step to reintroduce long term deposit to finance long term infrastructure projects. It will help banks in getting rid of asset liability mismatch. Past record of PS banks will prove that they indulged in long term lending by using short term deposits just to please the then UPA government. It is lending to infrastructure made by PS banks under the orders of previous Finance Minister which has added pain to already ailing banks. Further to add fuel to fire, money lent by PS banks to business houses are not coming back in time with speed of demand made by banks. It is therefore neither interest rate nor liquidity is to be blamed for slower credit growth , but it is purely and surely fear of default  and lack of enough expertise in branches of public sector banks to assess loan proposals which is responsible for slower credit growth during last few quarters.
 
It is the record of banks that they always act  as per whims of ministers in power instead of sticking to best banking principles for survival. They use to take credit from ministers by achieving targets by hook or by crooks and get elevation in post and get incentives from GOI. PS banks prevail upon all branch heads for achievement of their targets but do not think it wise and necessary to ensure quality lending.

RBI Governor  has proved by his action that mere reduction of interest is not going to help in growth of credit portfolio of banks until government makes other parameters conducive for credit growth and until banks develop enough expertise at field level to increase real and genuine credit growth. He has proved by his action that window dressing methods adopted by bankers during last few years to artificially show higher credit growth will not serve any interest in credit growth or in GDP growth and neither it is going to help in containing growth in Non performing assets of PS banks.
 
GOI will have to activate administrative machineries to give hassle free statutory clearances quickly and without giving much trouble to business men who desire to enter into manufacturing activities and it is the duty of GOI to help banks in recovering money from defaulters by making legal set up more active and effective .I salute Mr. Rajan for his boldness and proactive steps he has been taking for last one year. Banks can achieve advance target under pressure but cannot recover the money from defaulters under existing legal set up even if pressure from the government is increased to any extent.

It is also true that top officials of PS banks neither gave value to credit quality nor they gave required time and importance for recovery of loans from defaulters. Further it is also true that neither RBI nor other agencies like MOF, Audit teams and vigilance team took honest efforts to stop bankers indulging in bad lending and bad human resource management.

But during last few months , banks as well as other agencies have become somewhat serious on recovery and hence they got little success in containing fresh slippages. But real change will be visible only when they stick to quality lending and stop focusing on achievement of target only . Further real change will occur only when GOI get success in making its own machineries active and effective in real sense , not confined to only talks. They have to walk the talk which they do in public domain .

Lastly I have no hesitation in saying that due to faulty management by Chiefs of PS banks, by RBI and by GOI, these banks have suffered huge loss and they have accumulated as much as ten lac crores of bad debts . Now these clever officials are denying respectable wage hike to bank staff who are nowhere at fault in erosion in profitability or in rise in bad debts.