Tug of War Over Interest Rates

In what promises to be one of the most crucial politico-economic tugs of war for the Manmohan Singh government, finance minister P. Chidambaram and bankers have locked horns over a rate cut.
Chidambaram who wants to spur a faltering economy, on Wednesday urged hesitant bankers to cut interest rates to borrowers.  “I have impressed upon banks the need to cut base rates. In my view, reduction of the base rate will be a powerful booster, will be a powerful stimulus to the credit growth.”
The Reserve Bank of India has cut repo rates, the key policy rate at which the central bank lends money to banks, by 125 basis points since January last year in a bid to spur growth which has slackened to 5 per cent for the year-gone-by, far lower than the average of 9 per cent which India was posting in the last decade.
In response to the RBI cuts, the country’s largest bank and trend-setter, SBI, has cut its base lending rate by just 30 basis points between August 2011 and February this year to 9.7 per cent. Actual lending rates to most businesses are at least 2 per cent higher and in case of less highly rated firms as high as 6 per cent over the base rate.
Chidambaram's exhortions led to another round of mild rate cuts by a quarter percent by state run banks, though not matched by private bankers.
Rates charged by state run banks either equal SBI rates or are slightly higher. Rates charged by private banks are usually higher, except to blue chip corporate clients for whose business, banks are willing to enter into fierce rate wars.

Though the chief executives of nationalised banks who met Chidambaram promised a review of their base rates, most privately say it would be tough to cut rates.
“Our Non-performing assets have shot up … this means higher provisioning norms, which gives us little room for cutting rates … nor can we show lower profits, we are after all answerable to shareholders,” said the chairman of a listed PSU bank on the sidelines of the meet, which Chidambaram held today. 
Gross non-performing assets of PSU banks have more than doubled from Rs 71,080 crore as on March 2011, to Rs 1.55 lakh crore as on December 2012. To compound the banks problems, economic slowdown has meant that credit grew slowed down from 17.8 per cent to 15.6 per cent, making it tougher to wipe out red blots on their report card with profits from new businesses.
The problem is that many of the big firms whose loans have gone bad have political `connections' and going after them is often extremely difficult. Repeated restructuring of several big loans including one to an airline which hasn't flown for some time, hasn't helped the banks cut down on their bad loan overhang.
On the other hand, India's banks remain flush with funds, as depositors unhappy with a jittery stock market continued to park money with banks, especially with state run ones, which they seem to feel are safer than privately held banks. Deposits with state run or PSU banks have grown by nearly 15 per cent in the last one year. 
Bankers said “North Block owns majority holding in all PSU banks  … we can’t  ignore it … but we have to answer to shareholders, auditors, Parliamentary panels ... don’t expect too much.”
The current Congress-led coalition government is supposed to demit office by early 2014, when fresh election are slated for a new parliament. Many bankers would like to ride out the pressure till then without taking too many tough decisions which affect their balance sheets.
However, for the government pushing the economic growth rate is crucial to poll prospects as an economic turnaround would be a better story to sell during polls. But bankers keen to keep protect balance sheets and stay away from auditors' querries and litigations by agrieved shareholders do not seem to share the same enthusiasm.