Chapter 5 Blog

http://www.rupeetimes.com/news/personal_loan/sufficient_liquidity_still_seen_by_sbi_despite_3g_tax_cash_outflow_3664.html

Summary:

This article explains that there is enough liquidity in the system of the State Bank of India so that they do not have to increase interest rates in the short term. Even though the largest lender in India will see cash outflow of Rs 70,000 crore (which is aproximately 15 billion US dollars), they believe that there is sufficient liquidity. The chair man of the State Bank of India, O P Bhatt said that "on an average, there is still a fair amount of liquidity in the system. The large amount of cash outflow is going towards account of payments to be made to telecom companies. Although the liquidity in the system is relatively stable, the bank has repriced some categories of loans. It raised short-term corporate loans by 25-50 points, said Bhatt. The bank has also reported a decline in net profit in the fourth quarter.

Connection:

Chapter 5 is generally about cash outflow, liquidity, and cash flow statements. This article talks about how the State Bank of India, the largest lender in India, does not need to increase interest rates in the short term. This relates to chapter 5 in that even though there is a huge amount of cash outflow, the bank is able to balance its liquidity so that drastic action is not needed. The bank is about have a cash outflow of around 20 billion by mid June yet "there is enough liquidity in the system" so that interest rates do not have to be increased just yet.

Reflection:

While increasing interest rates can easily increase cash inflow in the short term, it may be bad longterm as many borrowers may seek an alternative lender to borrow from. There is always competition in this market and customers would of course seek to find the best deal. Increasing interest rates may increase the amount of cash earned from a transaction, but it will also reduce transactions which may decrease the bank's reputation. Especially as the largest lender in India, increasing interest rates may cause a small upstir and force borrowers to find another source of cash.