The Reserve Bank of India today slammed banks for not transmitting monetary decisions of the central bank to the larger system.
"Monetary policy transmission happens through banks. What we are saying is that policy rate has to be transmitted and for that people (banks) have to work, they have to transmit. If you don't transmit, policy rates will not serve the purpose," RBI deputy governor K C Chakrabarty told reporters on the sidelines of summit organised by Skotch, a consultancy firm.
In its monetary review yesterday, the Reserve Bank had refrained from cutting policy rate, but reduced cash reserve ratio (CRR), that will release Rs 17,000 crore into the system.
Chakrabarty said transmission will not happen if costs in the banking system are not reduced.
"If the spread does not come down, people will not get the benefit," he said.
He said CRR ws 25% and statutory liquidity ratio 40% at one point of time. "Now, SLR has come dwn to 23%, CRR is 4.5%. People say that it should be abolished, but has this benefit of reduction has gone to the people?" he asked.
Earlier, SBI chairman Pratip Chaudhuri had said CRR was unfairly put on banks. This had evoked sharp reaction from Chakrabarty who had asked him to find some other place if he could not work according to central bank's regulatory environment.
Chakrabarty said prime lending rate (PLR) of major banks was between 13.75 and 15% in September, 2008, when both the repo rate and CRR were 9%, while SLR was 25%. Now average PLR of banks is one% higher than the level of September, 2008, despite repo rate being at 8%, CRR at 4.5% and SLR at 23%.
If banks increase their efficiency, interest rates will come down. "What we call operational efficiency of the banks, that is one thing that should happen," Chakrabarty said.
On larger economy, he said unless there are institutional reforms, policy reforms will not percoloate downward.
"My view is that a lot of thing needs to be done at government level, state government level, at RBI level. But what has been done its full benefit has not been taken by the people. Reform is not taking place at individual level," he said.
He said unless you bring institutional reforms within each institution and improve efficience, benefit of reforms will not reach the people.
"There is nothing wrong in demanding what the government should do. But, as an individual we shoud see, how we can improve productivity & efficiency," he added.
Chakrabarty's comments came as the government announced a slew of FDI reform measures last week and is expected to come out with some more this week.