RBI reminder to banks: increase deposit rates, cut lending rates

Subbarao says RBI view on Malegam Committee report on MFIs by April-end.

The Reserve Bank on day again prodded banks to raise deposit rates to encourage people to save more and put the Indian economy on sustained double-digit growth and lower lending rates by cutting on salaries, wages and transactions costs.

At a meeting of the Institute of International Finance (IIF), a global association of financial institutions, RBI Governor D Subbarao also said that the central bank will come out with its views on the Malegam Committee report on micro financial institutions (MFIs) that favours a 24 per cent cap on interest rates charged by these entities, by April-end.

The central bank governor further said that the RBI will see business plans on financial inclusion of those interested in banking license.

“For double-digit growth that we aspire to, we need to save so that we can invest more and for that to happen, we need to encourage savings, which means that banks will have to increase the interest rates that they offer to depositors and they have to reduce the interest rates that they charge to borrowers,” Subbarao said.

In technical terms, he said banks have to bring down their net interest margin (NIM).

This is not the first time that the RBI is asking banks to increase deposit rates. It has been asking banks to do so to retain their depositors, since rising inflation sees net earnings from deposits going into the negative zone.

Subbarao said to cut lending rates, banks have to reduce non-interest expenses like wages and salaries, transaction costs, provision costs, NPAs and enhance productivity by leveraging on technology.

He said Indian banks need to do lots of catching up with their counterparts in peer group countries.

Average (deregulated) savings rates offered by banks in various categories range from 7-8 per cent, while their base rates (floor rate set for the purpose of lending rates) range between 7.60-8.5 per cent.

Generally, whenever banks face pressure on deposit rates, they also raise lending rates to keep their net interest margin intact. Currently, banks have net interest margin in the range of 2.5 per cent to 3 per cent.

On the MFI sector, Subbarao said these entities have offered added value in financial markets, but have drawn flak for charging very high interest rates which can be termed as usurious. They are also charged with following loose credit policies with instances of even benami lending, he said.

He, however, added that regulations should be such that they do not choke the MFI sector.

The RBI governor said banks consider financial inclusion as obligation and there is need for making them realise that it is a business opportunity. The central bank will see business plans of entities on financial inclusion while evaluating their application for entering into the banking space.

RBI is slated to come out with guidelines on entry of new banks some time this month.

Currently, banks pay up to 9.5 per cent interest on fixed deposits. Indian banks, Subbarao stressed, need to improve efficiency to catch up with their counterparts in the other nations.

RBI is scheduled to announce the guidelines for grant of new bank licences by month-end. The central bank, in August 2010, brought out a discussion paper on giving out new banking licences to business houses and non-banking finance companies, besides regulations for the same to foster greater competition.

The RBI also sought to know “whether industrial and business houses could be allowed to promote banks.” Furthermore, it sought stakeholders’ views on whether NBFCs should be allowed to convert into or promote banks. The RBI has received comments on its discussion paper from all stakeholders. Various entities such as Reliance Capital, IndiaBulls, Religare, IL&FS, IDFC, IFCI and Aditya Birla Financial Services are reported to be mulling entering the banking space.

At present, India has 26 public sector banks, seven new private sector banks, 15 old private sector banks, 31 foreign banks, 86 regional rural banks, four local area banks, 1,721 urban cooperative banks, 31 state cooperative banks and 371 district central cooperative banks.