The banks these days are facing a tough time. The competitive business environment has been affecting the performance of the top banks across the nation. The reason is but obvious- ‘the high Inflation.’

Since the time Reserve Bank of India (RBI) has hiked the CRR rates, the banks have been in the soup. On Tuesday, top bankers expressed their concerns to RBI on prospective margin pressures and rise in bad loans.

T S Narayanswami, chairman of Indian Banks’ Association met the RBI brass comprising Rakesh Mohan, P Leeladhar and Shyamalal Gopinath along with the delegation of bankers. The interaction is part of the consultations prior to the first quarter review of RBI's annual policy for 2008-09 scheduled on July 29, 2008.

The discussion saw bankers raising four issues of concerns- the rising global crude oil prices, sharp increase in inflation after oil companies hiked prices, pressure on margins and non-performing assets. All present in the meeting agreed with the strong fundamentals of Indian economy.

“The economy could grow eight per cent in 2008-09,” H N Sinor, chief executive, IBA, who also attended meeting said.

He further said that with the rising inflation, banks have begun to feel the pressure on their margins. Banks have raised the deposit rates to provide attractive returns for garnering resources, but they could not immediately jack up the lending rates.

Other than effects on the interest margins, when costs shoot up and demand slumps, some of the advances could turn into non-performing assets.

With interest rates rising, bankers fear an increase in defaults, especially on unsecured personal loans and credit cards. Over the last five years, retail loans have been the biggest drivers of credit growth. Some of the loans given to companies may also turn non-performing, said a bank chief.

The result of high inflation is front of us. RBI had to raise the repo rate-the rate at which RBI lends money to other banks.

Worse than this, CRR has been increased by 125 basis points since April and will touch 8.75 percent later this month. . With inflation continuing its rise, the market is expecting more monetary tightening measures in the months ahead.

The government has now passed on the burden of combating inflation to RBI fearing slowdown. Government initially was avoiding any increase in he lending rates. RBI feels that monetary policy is the first line to avoid inflation.