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Interest rates may go up: Bhatt

Last Updated: Monday, January 11, 2010 - 18:44

Mumbai: SBI Chairman O P Bhatt on Monday hinted at an increase in interest rates and further said loan defaults would continue to rise, particularly in the SME sector, for the next six months.

"Inflation is rising and there are fears that regulatory action may lead to hardening of interest rates," Bhatt said at the Bancon conference here.
The Reserve Bank is scheduled to review its annual monetary policy later this month. It is widely anticipated that the apex bank will hike Cash Reserve Ratio (CRR), the amount banks have to park with it to tighten the money supply. The expectation of a CRR hike is strengthened by inflation which is hovering around at around 19 per cent.

Referring to a possible rise in defaults, Bhatt 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.
He also said India is likely to maintain an 8 per cent economic growth and it can reach 10 per cent in the later years. "The combined dynamics of multiple factors in social, political and economic sectors are such that come what may, the country will continue to grow at 8 per cent (GDP) for the foreseeable future," Bhatt said.

Bhatt said the consolidation in the banking industry remains a concern owing to its slow pace. Indian banks will have to grow in size and scale, which otherwise, will act as a constrain for local lenders to compete with their counterparts abroad.

On State Bank’s consolidation process, Bhatt said the process is happening at a slow pace. "We started the process of consolidation, but it is going a bit slow," Bhatt observed.

Whether Indian banks will be able to find adequate capital to finance the fund-starved infrastructure sector also remains a challenge, he said. The Government estimates a investment of USD 500-billion to develop ports, roads and airports over the next 5 years.

Also, banks will have to fine tune their risk management mechanisms in the face of challenging market conditions, he said.

Further, Bhatt said despite challenges, India is likely to maintain a growth rate of 8 per cent and can reach to 10 per cent in the later years, he said.

The combined dynamics of multiple factors in social sector, political sector and economic sector is such that come what may, the country will continue to grow at 8 per cent for the foreseeable future,"Bhatt said.

The centre of economic activities is slowly and surely shifting to East, particular India and China and global investors are increasingly focusing on India, he said.

Given the strong fundamentals of the economy, bank credit, over the next 3-5 years is expected to grow by 20-25 per cent for the industry.

SBI, which had set a credit growth target of 25 per cent in the beginning of this fiscal, however, lowered its target to 16-18 per cent given a slow credit off-take.


First Published: Monday, January 11, 2010 - 18:44
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