Reserve Bank of India Deputy Governor K. C. Chakrabarty on Wednesday maintained that while high interest rate was not solely responsible for the economic slowdown, high inflation was “definitely” one of the reasons for the sluggish growth.
Interacting with journalists on the growth-inflation issue at an Assocham event here, Dr. Chakrabarty said: “Slowdown in the growth is for a variety of reasons…what we are trying to say [is] that interest rate is not the only reason for the slowdown in growth. But inflation is definitely a reason for slowing down the growth”.
Dr. Chakrabarty also went on to admit that in a way, monetary policy was also responsible for the tepid growth in that it was unable to contain inflation. “Yes, to the extent monetary policy is not able to control the inflation and not effective, it is responsible. We cannot say something wrong happening in the economy, we are not responsible. Collectively, we are all responsible”.
The RBI Deputy Governor, in his address at the event, exhorted banks to provide credit to the productive sectors of the economy and not shy away from giving loans to them in view of their own rising NPAs (non-performing assets).
“Because of NPA fear, banks need not stop lending but banks must improve their credit management capability for which there is enough scope…when NPAs are high, your risk management system has to be improved, your credit appraisal system has to be improved,” Dr. Chakrabarty said while pointing out that banks need to pay more attention to the credit needs of agriculture, SMEs (small & medium enterprises) and retail.
Dwelling further on the NPA issue, Dr. Chakrabarty sought to blame the corporates for most of the rising bad loans and for which the honest borrowers have to pay more. “…NPA is creation of the corporate sector, a major part of the NPA. You borrow from banks; you don’t pay them in time. They become NPA in the books of the banks…So why you are not able to pay back? Because your cost is more, income is less,” he said.
Dr. Chakrabarty asserted that interest rates could be reduced only if corporates were able to bring down the risk perception of banks. “If you [corporates] can bring down risk in the economy, if the bank perceive that there is no risk, your interest will become 9-10 per cent,” he said.
As for the liquidity situation, Dr. Chakrabarty said there were enough funds available to take care of the lending activities of the banking system. “I think liquidity is okay...whatever is the liquidity, that is adequate and comfortable. This is always monitored,” he said.