Bankers are expected to sound the alarm bells on the rise of restructured loans during the pre-credit policy meeting with the Reserve Bank of India (RBI) on Wednesday. Most bankers fear that restructured loans could turn into non-performing assets (NPAs) if the economy does not revive.

“Restructured loans are a point of concern as a large number of accounts are getting restructured with the fond hope that cash flows will crystallise. But if the economy does not limp back to a normal growth cycle, it will be a matter of grave concern for the banks,” says TS Narayanasami, chief of Bank of India and chairman of Indian Banks Association (IBA).

A reduction in the prime lending rate (PLR is the rate at which banks lend to prime customers) would also be discussed as margins for most banks are under pressure due to a sharp fall in the PLR in the past six months.

While various public sector banks have brought down their PLRs by nearly 150-200 basis points, private banks have reduced their PLRs by only 50 basis points.

It is expected that public sector banks would be browbeaten to lend below 10 per cent, with the rate of inflation also inching towards the negative territory.

Most bankers, however, say, “The deposit rates should fall in tandem with the lending rates. With the interest rates on postal savings and public provident fund ruling at 8 to 8.5 per cent, banks are in a tight spot on reducing deposit rates below

8 per cent.”

The credit policy, on April 21, is expected to give a macro-economic perspective on the total money supply in the system while giving pointers on the economy, credit growth targets and interest rates.

Another major concern that is to be highlighted in the meeting is on how credit flow to productive sectors can be maintained. RBI has consistently maintained that interest rate response to the monetary policy easing has been faster in the money and bond markets as compared to the credit market as a reduction in deposit rates has a lag effect to impact the bank deposit rates.

But from the real economy perspective, lending rates will have to come down for the monetary policy to have demand-inducing effects.