Corporate defaults possible if rates keep high: Kamath

He said that drying up of liquidity is resulting in corporates not getting money, and if at all, it is at high costs

New Delhi: Concerned over the interest rates in 'high teens´ that could make India a high-cost economy, the Confederation of Indian Industry (CII) President K V Kamath said that corporate defaults beginning with small and medium enterprises cannot be ruled out.

Besides, infrastructure sector that needs a mammoth $750 billion of investment could be a casualty and affect India's competitiveness, warned Kamath, saying these issues were high on his agenda for Prime Minister Manmohan Singh's meeting with corporate leaders tomorrow.

"As of now, we are not seeing big corporates defaulting. But I cannot rule that out, particularly starting with SME sector. (If) We continue to have high interest rates," he said.

"Clearly, bankers are worried about SMEs and I would worry about them too. You have a situation where they would be most fragile," Kamath said when asked about apprehensions that major corporate players, including some in the reality sector, have started defaulting.

"It is not just interest rate challenge that we have. There are more challenges such as availability of funding. I am entirely with the finance minister and the government when they say banks should lend," said Kamath, who also heads India's largest private sector lender ICICI Bank.

He, however, quipped that the situation today is that call rates (short-term inter-bank lending rates) have surged to 22%. There is a real fear that we can become a high-cost economy," he said and pointed out that the CRR cut of 2.5 percentage point in October had already dried up.

While welcoming the RBI's move yesterday to inject about additional Rs85,000 crore liquidity, he said: "Although the decision was concrete and welcome, more is needed in case corporate India has to get funds from banks at 3-4% lower rate of interest."

Kamath said: "We are actually lucky because corporate India is still in good shape except that there is a little more concern about SME sector. Interest rates are going to be a challenge for them."

Asked to comment on reports that term-lending bodies like IDFC are charging interest rates up to 24% and can this throw India back to a high-cost situation like the one witnessed in mid-1990s, he said: "The fear is 'real´. India can become a high-cost economy."

"The simple reason is that one-year deposit and bulk deposits are still between 11-12%. Then you have additions like cost of carrying SLR, CRR and risks in operating costs on incremental basis, banks' lending costs itself would be 15%," he said.

"Somebody (term-lending institutions) is borrowing from banks and lending on. While it is not 24%, we are seeing interest rate in high teens. Clearly, at this rate, we are not going to be competitive," he said.

Kamath said that drying up of liquidity is resulting in corporates not getting money, and if at all, it is at high costs.

Stating that government and RBI have indeed succeeded in their battle to rein in inflation, he went on to add that now it is time to shift focus to growth, which requires releasing of more money into the system and creating an environment where interest rates come down.