Deposit Rate Cut Indicated On Eve Of Credit Policy

The minister said it was necessary to bring about a realignment of interest rates through a mix of regulation and voluntary restraint since he considered a real positive deposit rate of 4 per cent to 7 per cent and a real positive lending rate of 10 per cent to 14 per cent to be too high by all accounts.

The minister stated that in his view, real interest rates, after netting for inflation, should be the lowest for one year treasury bills and the highest for lending by banks and financial institutions to non AAA customers.

``While I am generally for deregulation and freedom, I cannot discard the power of suggestion or the benign impact of some regulation, the minister said, while inaugurating the Fedbank Hormis Memorial Foundation at Kochi.

 

In what amounted to unveiling the governments proposed reforms for the banking sector, the minister hinted at the need to remove rigid institutional boundaries to enable the mergers and amalgamation of the public sector lending institutions.

The minister stated that while the world at large was moving towards ``universal banking, the banking structure in India was marked by a plethora of institutions such as commercial banks, development banks, specialised sector specific development banks, special apex refinancing institutions, apart from investment banks, finance companies and mutual funds.

Such segmentation curbed their size and resulted in market place distortion, particularly with regard to the interest rates. The variations in the interest rates were primarily on account of the different regulatory standards applicable to them, but such market distortions hampered the freedom of the Indian banks to grow to global sizes, the minister said.

Making a strong case for technology upgradation, the minister clarified that ``computerisation does not destroy jobs, it only changes the nature of work. It does not lead to a reduction in the work force, it only changes the composition of the work force.

The minister extolled those trade unions which had been accommodative towards new technology. But he pointed out that the pace of change was so frustratingly slow that it was affecting timely information inputs for decision-making in critical areas of banking such as asset-liability management, leading to difficulties in credit risk control and recovery.

The minister also highlighted the need to revitalise rural credit system. The minister pointed out that the system cannot be sustained if the loan recovery was under 60 per cent. In the case of IRDP loans, for instance, the recovery was barely 30 per cent.

The minister informed that idea of private, local area banks announced in the recent budget was catching on.

The Reserve Bank of India had already received a dozen applications and the apex banks would soon start issuing licences.

He also pointed out that for banks to be competitive, they should be permitted to follow their personnel policy.

``If a bank meets capital adequacy and bad loan criteria, it should get the freedom to go to the open market to recruit young men and women and fix its own compensation package, the minister said.

The minister took a swipe at the banking division in the finance ministry when he said that almost 60-70 per cent of its time was spent in responding to queries, VIP references and dealing with postings and transfers.

``There is no time left for strategic regulation, which is what it ought to be doing in the first place, the minister said.