Rate rise may lead to more defaults: Banks tell RBI

NEW DELHI: Banks have warned the Reserve Bank of India (RBI) that repeated rise in interest rates could push up defaults, especially in case of highly-leveraged firms, infrastructure projects and small scale enterprises. Even individual borrowers are feeling the pressure of higher equated monthly installments (EMIs) on home loans, which have increased 12.5% over the last one year. In several cases, borrowers are now being asked to shell out a lump sum payment as the tenure has gone past 20 years due to the rise in rates. RBI has resorted to increasing key policy rates 11 times in the last 16 months, which has translated into higher lending rates and increase in the monthly instalments for corporates and individuals.  A bank chief said the industrial slowdown, which is affecting the demand projection of companies, and consequently cash flows, was also putting pressure. Besides, input costs have remained at elevated levels and wage bill has gone up considerably over the last 12-18 months. The issue was discussed during RBI's post-monetary policy meeting with bank chiefs on Tuesday. Another banker who attended the meeting at the RBI headquarters on Mumbai's Mint Road said the central bank's assessment was that there was no systemic risk at this point of time. "The net profit-sales ratio has remained around the same level which shows that companies are able to pass on the higher input and debt costs. So the increase can be passed on," he said.  One suggestion was to lower the margin, especially for small-scale units, but bankers said it was a tough ask given that most of them had moved to a risk-base pricing system in the base rate regime. "While it is true that the large corporate gets loans that are closer to the base rate, the small borrower cannot enjoy the same facility as we price loans based on the rating system. The small borrower will always have a lower rating compared to a large corporate," said yet another bank chairman.  RBI has in any case decided against providing any special sops to sectors such as infrastructure where several projects are delayed due to land acquisition or other problems.

TOI