Cut costs, bring transparency in lending rates: RBI to banks

Reserve Bank of India (RBI) Governor D Subbarao on Wednesday asked banks to cut operating costs and improve transparency in lending rates to give a better deal to customers and to face competition.

Although overall efficiency and productivity have improved, resources were not being utilised in an efficient manner. There was a degree of stickiness and non-transparency in bank lending rates, Subbarao said addressing a banking seminar organised by the Indian Merchant’s Chamber.

RBI had earlier said that though it had aggressively slashed the policy rate in the aftermath of the financial crisis, banks were not bringing down lending rates in a similar fashion.

Responding to the financial crisis, the central bank had cut the repo rate (the rate at which RBI lends to banks) by 425 basis points, and the reverse repo rate by 275 basis points. The cash reserve ratio (CRR) was also reduced by 400 basis points.

Subbarao said banks needed to reduce costs and pass on the benefits to both depositors and lenders.

Banks have cut their prime lending rates by around 200 to 250 basis points since October 2008.

“The intermediation cost in India is still high, largely due to high operating costs... The challenge for Indian banks, therefore, is to reduce costs and pass on the benefits to both depositors and lenders,” he said.

The Bank’s funding costs are set to rise due to the proposals at the global level to mandate higher capital standards and cautious approach in the wake of the global financial crisis.

“This means that Indian banks will need to improve efficiency even as their cost of business goes up. This is a challenge that will test ingenuity, perseverance, ability to learn, adapt and their management skills,” he said.

Referring to the challenge before banks in funding infrastructure projects, he said investments in infrastructure projects during the Eleventh Five-Year Plan was pegged at $520 billion. Out of it, 21 per cent was expected to be financed by banks.

The big issue in bank financing of infrastructure was the asset-liability mismatch. While infrastructure typically requires long-term funding, the deposits of banks, their main source of funds, were relatively short-term, he added.

RBI, to partly offset this problem, had allowed banks to enter into take-out financing arrangements with other financial institutions in 2000.