Indian banks need to raise deposit rates and cut lending rates to help economy: RBI
MUMBA: Indian banks need to raise their deposit rates and cut lending rates to help the economy expand at a faster pace, Reserve Bank of India Governor Duvvuri Subbarao said Friday, Wall Street Journal reported.
"To achieve our collective aspiration of double-digit and inclusive growth, we need to raise the level of national savings and channel those savings into investment," he said at a banking seminar.
The central bank has been pushing lenders to raise deposit rates for some time now. In its September monetary policy review, it said that "if bank credit is not to become a constraint to growth, real rates need to move in the direction of encouraging bank deposits." Already, the strains are evident in the banking system with deposit growth lagging loan growth, accentuating a high cash shortage.
The governor's call comes at a time when the Indian economy is on a high growth path, clocking 8.9% in the July-September quarter. The government hopes to return to the pre-crisis growth rate of 9% next fiscal year that begins April 2011 and ultimately hopes to achieve double-digit expansion.
Mr. Subbarao also said that Indian banks' net interest margins remains higher than some emerging-market economies even after accounting for subsidized loans for farmers and other social obligations.
The net interest margin of the Indian banking system was 2.5% in the financial year ended March 31, down from 3% in the preceding year, according to central bank data.
Mr. Subbarao said Indian banks must optimize operating costs such as non-interest expenses including wages and salaries, transaction costs and provisioning expenses.
"This will enable banks to lower lending rates while preserving their profitability," he said.
He said that operating costs can also be reduced by improving asset quality, diligent loan restructuring of viable assets and reducing nonperforming loans through recovery or upgradation.
Mr. Subbarao also said that mergers among Indian banks to achieve scale should be marketdriven and based on profitability considerations, but warned that bank consolidation through mergers isn't always "a totally benign option."
He suggested that some larger banks should look globally to expand including through acquisitions. "They should look out more actively in regions which hold out a promise of attractive acquisitions."
Indian banks have been hampered by scale in their global aspirations. State Bank of India, the country's largest lender by assets, is ranked 74 globally. Mr. Subbarao also said that the central bank prefers a subsidiary route for foreign banks in India rather than a branch presence. -PB News
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