The pressure is now on the banking industry to lend fast and at much lower rates. The Rs 20,000-crore extra liquidity pushed in by the central bank through a cut in cash reserve ratio to 5% and the simultaneous announcement of the finance ministry to revise upwards credit targets of public sector banks will build pressure on the banks to expedite lending in this quarter.

The government said it will closely monitor, every fortnight, the provision of sectoral credit by public sector banks. The total incremental non-food credit from banks in the latest fortnight was only Rs 1,549 crore. As a result, non-food credit in this fiscal has slipped to 11.9%. The government statement said the credit target revision, together with a 100 basis points reduction in both repo and reverse repo rates, has been done ?to reflect the needs of the economy in the present difficult situation.?

RBI said that while raising credit, banks should monitor their loan portfolio and take early action, including debt restructuring where warranted, to prevent the rise of bad assets down the road and safeguard the gains of the last several years in improving asset quality. ?At the same time, banks should price risk appropriately and ensure that quality enterprises continue to get funding.?

The enhanced lending targets, coming with such strict riders, have put the banks in a tight spot. On top of that, the cost of funds has not come down significantly for banks. This would constrain the banks? ability to lend, though parking money with the central bank has also become unattractive at the latest reverse repo rate of 4%. Experts expect the banking sector?s net profitability margins to be hit at least by 10 to 15 bps this fiscal year.

While most banks hedged a call on slashing interest rates, Allahabad Bank was the quickest to pick up the cue on Friday. Within hours, it announced a 75 bps reduction in its benchmark prime lending rate to 12.5%. Later, Union Bank of India said it would cut deposit rates in the range of 25-135 basis points across various tenors from Jan 5, 2009. Banks seem to have realised that they have no escape from a rate cut this time.

Speaking to FE, bankers, particularly from the public sector, have confirmed that they would be announcing rate cuts shortly in response to the Friday?s stimulus package. OP Bhatt, chairman, State Bank of India (SBI), the country?s largest bank, said, ?I see it coming down further.? While the CRR-cut will increase the banks? income, the other reductions are indicative, Bhatt said.

Bhatt said the new stimulus package should lead to a spurt in credit offtake from mid-January, particularly after Makar Sankranti.

KC Chakrabarty, chairman & managing director, Punjab National Bank, hinted that the bank may revise its rates by the month-end. ?We had anticipated the monetary measures in advance and had announced a few days back a cut in our interest rates, effective Jan 1, 2009. Our ALCO (asset-liability committee) is scheduled to meet in the last week of this month and most likely we may lower the rates further, as the CRR reduction has infused liquidity of around Rs 1,000 crore in PNB.?

MD Mallya, CMD, Bank of Baroda, added, ?Our ALCO is scheduled to meet within 7-10 days, and is expected to take a final call on the interest rates.?

The rates may go down since the CRR cut has infused liquidity worth Rs 700 crore in BOB. ?I do not rule out the possibility of more such monetary measures by RBI in the future,?? he said.

Similarly, MV Nair, CMD, Union Bank of India, said, ?With effect from February 1, 2009, we are lowering our lending rates as the CRR cut has added Rs 600 crore of liquidity in our bank.?

Private sector banks too see rate cuts as imminent. Rana Kapoor, managing director & CEO, YES Bank, said, “Our ALCO is meeting next week, and is most likely to reduce the lending rates by 0.5% and deposit rates by 0.5-1% for different tenors. J Moses Harding, executive vice-president, InduInd Bank, said, “Our ALCO is scheduled to meet by the end of this month and is expected to lower the rates.? The CRR cut has enhanced the bank?s liquidity by around Rs 100 crore.

Since mid-September 2008, the central has reduced the repo rate from 9% to 6.5%, reverse repo rate from 6% to 5% and the cash reserve ratio from 9% to 5.5 %. The cumulative amount of primary liquidity made available to the financial system through various RBI measures is over Rs. 3,00,000 crore.

Though on the positive side, inflationary pressures have eased significantly, declining to 6.38 % as on December 20, 2008, down by more than half from the high of 12.91% on August 2, 2008. At the same time, there is evidence of economic activity slowing down, said RBI.

Exports have registered a negative growth for the two recent consecutive months, October-November 2008, for the first time since February 2002. The index of industrial production (IIP) registered a negative growth of 0.4% during October 2008, with the manufacturing sector registering a negative growth of 1.2 %, the first since April 1994.

IIP growth during April-October 2008 at 4.1% was less than half of 9.9% during the corresponding period of the previous year. The services sector, which has been the main growth engine in the last several years, has also been slowing down. Business confidence has been dented significantly. There are clear signs of deceleration in investment demand.

Key measures

• Repo rate cut to 5.5%, reverse repo to 4%

• Both reduction are effective from Friday

• Cash reserve ratio cut by 50 bps wef January 17

• CRR cut to infuse Rs 20k cr into financial system