Mumbai: Two leading bankers on Monday hinted at RBI tightening its monetary stance, which may lead to an increase in interest rates, and warned of rising loan defaults in the short-term -- an indication that lenders may make higher provisions for NPAs.
Indicating a hike in interest rate if RBI tightens its monetary policy, SBI Chairman O P Bhatt said, "Inflation is rising and there are fears regulatory action may lead to hardening of interest rates."
His counterpart at Indian Overseas Bank S A Bhat said an increase in key lending and borrowing rates (repo and reverse repo) was unlikely. However, he said said RBI may hike CRR -- the amount banks have to park with it-- by at least 0.25-0.5 per cent.
He added that IOB`s lending rates are expected to remain stable till March regardless of the monetary policy actions. "What is the use of hiking our rates when there is very less credit demand."
The Reserve Bank is reviewing its monetary policy later this month. It is widely anticipated that the apex bank will hike Cash Reserve Ratio to tighten money supply, considering inflation which is hovering around at a high level of 19 pc.
The apex bank had adopted a soft monetary stance in the wake of global financial turmoil to spur the economy.
On loan defaults, the chief of the country`s largest lender said, "Non Performing Assets (NPAs) are rising, specially in the SME sector, and given the lag effect my sense is that it will continue to rise over at least the next two quarters," said at bankers conference here.
IOB said its bad loans are likely to increase in the December quarter but would stabilise in the January-March quarter. "Our NPAs have been rising in the period till September. This is likely to continue in the third quarter also. After that, I expect it will stabilise," Bhat said.
Projection of higher NPAs comes despite many banks lowering their credit growth targets. While SBI lowered it to 18 per cent from 25 per cent early in FY10, IOB lowered the target to 15 per cent from 18 per cent following a decline in demand in the wake of global financial crisis.
The Reserve Bank has also projected a credit growth of 18 per cent for the fiscal.
Banks` pessimistic outlook on asset quality would mean they could turn to more risk-averse approach and tighten their lending to small customers.
Higher defaults will also result in higher provisioning for NPAs which in turn will affect adversely profitability.
When asked whether NPAs were coming from specific sectors, IOB`s Bhat said, "It is coming from all sectors."