India’s banks are “on the verge of collapse”, the head of the Reserve Bank of India (RBI) has warned, amid growing concerns over their finances as the government looks to revive the economy.
Key points:Indian banks have been rocked by losses since mid-2016 and are expected to fall furtherThis week, the country’s finance ministry announced that it would cut their lending levels by 30% to reduce exposureThe central bank has cut interest rates by up to 25% in the last two months and has already announced a series of measures to help the economy recover.
However, the central bank said on Wednesday that it is not looking at raising rates further and is “not in a position to do so”.
“The current situation is very different from the situation at the end of 2016,” Raghuram Rajan, the RBI chief, told reporters.
“I don’t see the risk of the banks falling any further.
I don’t think the risk has increased.
The risk of banks not being able to pay back any more is quite low.”
The central banks decision on Wednesday to cut interest rate rates by 25% to help bolster the economy, following an initial cut by 25 basis points, comes amid fears the economy is slowing and the banks could run out of cash.
However the central banks move has sparked criticism, with the National Democratic Alliance (NDA) saying the government is trying to distract from the economy’s problems.
The NDA government has cut the government’s credit rating by one notch to Baa3 from Baa2 in recent weeks, with analysts blaming the move on the RBI decision.
Mr Rajan said the government was not looking to cut rates further.
“We are not in a situation where we are looking at further rates,” he said.
“But the risks are very low.
The risks are extremely low.”
If there is a further reduction in the policy rate, that would be in line with what we are doing today.
“While the central bankers decision has raised concerns about the banks future, it has not brought the banks any immediate cash, which has left the government with little incentive to increase rates.”
The problem is that there is not any liquidity available to the government,” the finance ministry said in a statement on Wednesday.”
To address the liquidity issues, the Reserve Board has decided to raise the benchmark interest rate by 25 percentage points in a phased manner over the next two months to help restore the banks’ solvency.
“In March, the government cut its benchmark interest rates for the first time in two years, with Mr Rajan saying the move was necessary to help revive the banking system.
The RBI, however, has warned that the decision to reduce rates had a negative impact on lending.”
There is a risk of a further decline in the lending rates, particularly for small and medium-sized enterprises, which are the most vulnerable,” the RBI said in its statement on Thursday.”
Risk of further adverse changes to the current macroeconomic outlook is quite high.
“While the RBI is aware of the risks, it will take steps to mitigate the impact of the measures.”
Mr Rajaan said that the government would consider further steps if necessary.
“These measures will be taken in consultation with the private sector and with the RBI.
We have taken the steps to reduce the borrowing costs of small and large enterprises,” he told reporters at the Reserve House.”
They have the right to borrow at their current rates.
If the rate cuts continue, the banks will run out.
That is the main concern.”
The bank has also said it would increase lending to banks in the private banking sector.
“Achieving sufficient level of liquidity in the banking sector is essential for the stability of the financial system,” the government said in March.
“Without sufficient liquidity, the banking industry will be unable to cope with the shocks and will be adversely affected.”
The government has also announced measures to boost the economy through incentives for businesses, which include a new tax on big firms.
The central government said the tax would be applied from April 1.