Why PSBs may not give cheap loans even after fund infusion

The big question that is in the minds of most people is - can public sector banks really cut rates ahead of the upcoming festive season?

CNBC-TV18's Latha Venkatesh says the decision to cut rates or not does not quite depend on how much capital you raise, that depends on what is the overnight rate in the market. At the moment given that both the Consumer Price Index (CPI) and the Wholesale Price Index (WPI) inflation came in a good 30-40 basis points higher than the previous month, chances are the Reserve Bank of India (RBI) will hike the repo rate in the forthcoming credit policy and therefore accordingly the cost of raising deposits for banks will if anything rise. Also Read: Here's how govt plans to infuse Rs 14000cr into PSU banks Maybe at the moment there will not be a rise, because the Marginal Standing Facility (MSF) rate also could be cut, but the decision cannot be linked to capital is the basic point. It appears in the discussion and in previous statements made by the Finance Minister and ministry officials that there is a strong urging on the part of the ministry officials to tell banks to go ahead and cut rates. This is where the problem arises. If there is so much of goading of the shareholder to cut rates and to lend to specific sectors at specific times then the commercial viability or the due diligence done by banks could be at stake when there is so much pressure from the shareholder. Also it is at loggerheads with what the regulator is doing which is the RBI which is likely to raise rates. So banks are really caught between these two forces and this may end up in misdirected lending or lending to the wrong people and the wrong sectors at wrong times. If lending was left to only due diligence and the commercial sense of the bankers perhaps these rate cuts would not have come and therefore this is something that you should watch with trepidation when a government imposes on bankers to cut rates at a time before election. Another important point to be noted, when the equity dilution immediately comes you will actually see a fall in share prices, because the book value which is the total net worth divided by the number of shares will actually fall and usually share prices will fall to adjust to the book value. If this is accompanied by somewhat reckless lending then the share prices could fall even further. The other negative for banks is that the shares are being given at a time when the share price is very low. Capital infusion that comes when shares are priced very low because of the macroeconomic environment usually leads to higher dilution. So to that extent as well capital infusion is coming at an unfortunate time. If it had come maybe six months ago, the amount of dilution would have been less and the impact on the book value and the Return on Equity (ROE) would have been less. So even on that count it is a rather unfortunate time that this capital infusion is happening. It will be negative for share prices.