In a recent statement, finance minister, Pranab Mukherjee expressed that the banks should lower the lending rates, considering the dipping industrial output levels, industry demand for cheaper funds, in view of economic slowdown and liquidity trap. The (what is union?) had also issued a directive stating the banks and industry associations must meet on a regular basis to ensure adequate corporate credit flow.

At the 62nd annual general meeting of the Indian Banks’ Association, Dr Rakesh Mohan, Deputy Governor, RBI reasoned over the scope for banks to lower the lending rates, stating Indian banking system has a healthy capital base, strong underlying assets and discreet norms and regulations. This is evident by low NPA, ample liquidity, above normal risk-adjusted capital adequacy ratio of banks and continual long-term profitability. These factors put together gives banks scope for cutting lending rates.

However, banks deny scope for larger rate cuts considering that it would inversely effect the overall profitability of banks. Bankers confide that lowering of the rates will hit profit margins as the net interest margin (difference between cost of funds and earnings on the loan advances) will reduce. Most of the corporate loans are extended below prime lending rates. These includes agri and export lendings and lendings to well-rated companies, including PSUs. The weighted average lending rate has increased to 12.3 percent (provisional) in FY 2007-08, against 11.9 percent in FY2006-07, which is just a marginal increase.