In­dian banks need to raise de­posit rates and cut lend­ing rates to help econ­omy: RBI

The Pak Banker - - Front Page -

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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