World Bank Loan

This is with  reference to the article Why India does not need the World Bank loan( Business Line dt 7/10/09). The author has rightly argued why our Public Sector Banks do not require the World Bank Loan. It is true that our Public Sector Banks which have been capitalized more than the regulatory requirements and the international standards( as per Basel II norms) and which are financially sound should not have been clubbed along with India Infrastructure Company Ltd and Power Grid Corporation Of India to justify raising of loans from the world .

To support the economic growth envisaged at around 8 per cent and above, the banking system needs capital base and this has to be and can be easily found internally. As it is, the liquidity is very high in the system and the credit off take has not been at the desired / expected level and banks are finding it difficult to reduce the intake of deposits by reducing interest rates further because of better rates offered under Governments savings schemes. The lending rates have not gone down and are not likely to go down further because of inflation expectations.

Besides, with very high demand for funds from the Government sector owing to huge fiscal deficit the chances of reducing interest rates by banks and creating credit off take are remote. In addition, the level of raising non performing loans will automatically put a check on banks to expand credit.

In this back ground, there is no urgent need for banks to expand their capital base and that too from an outside international agency. There are umpteen ways banks can raise resources from both domestic and international market at very competitive rates on their own merit and strength and that is what the Government should encourage. This is the message we have to give to the International Financial system in general and international financial institutions like The World Bank in particular.

(This appeared in Business Line 13/10/09)

Dr.T.V.Gopalakrishnan