Liquidity may spurs banks to further lower the lending rates
By Neelima Shankar
May 29, 2009
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Relating the performance of the Indian banking system to the lending rates, Dr Rakesh Mohan, Deputy Governor, RBI expressed that the Indian banks are fundamentally strong and have more scope for lowering the lending rates. Dr Mohan was speaking at the 62nd annual general meeting of the Indian Banks' Association.

Dr Mohan reasoned that the Indian banking system has remained immune to global economic crisis due to its healthy capital base, strong underlying assets and discreet norms and regulations. This is reflected in the continual long-term profitability and liquidity and hence, lowering of rates by the Indian Banks is justifiable. "Banks' risk-adjusted capital adequacy ratio is above normal. NPAs are low. Despite the adverse macro-economic environment, banks have posted robust profits. Liquidity is strong. Therefore, banks will be in a position to cut lending rate," Dr Mohan said.

The recent stress tests conducted on the Indian banking system by RBI reveal that even if banks were to increase NPAs by 100 to 200 per cent, the overall capital adequacy ratio would be justifiable.

Dr Mohan emphasised on the need to focus on priority sector lending, saying, "Though credit growth continues to be high, banks have not done well in providing adequate loan support to fund starved SMEs."


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