Buffer the capital base, RBI tells banks

Pass on benefits of lower interest rates to borrowers

In view of the global financial meltdown buffering the capital base by domestic banks was obviously a standard and much needed response to risk management, he said.

Delivering the keynote address at the International Banking & Finance Conference 2009, on “Banking – Crisis and Beyond,”  he dwelt on four challenges that the banking sector has to meet head on.

He suggested deepening financial inclusion, financing infrastructure, strengthening risk management and improving efficiency. “These are formidable challenges, and meeting them is going to be an exciting, rewarding and fulfilling opportunity.” he said.

Conceding that infrastructure typically required long term funding, while the deposits of banks – their main source of funds – are relatively short-term. The problem of asset-liability mismatch in long term financing is not unique to India; banks elsewhere too face the same problem.

Asset-liability mismatch

Even as asset-liability mismatch may pose a huge challenge for banks doing infrastructure lending, they need to sharpen their risk management tools to avoid defaults, he added.

Subbarao also asked banks to slash operating costs and bring in more flexibility as well as transparency in lending rates. “Although overall efficiency and productivity have improved, resources are not being utilised in the most efficient manner. There is a degree of stickiness and non-transparency in bank lending rates,” Subbarao said.

He had earlier pointed out that banks were not proportionately cutting lending rates, even after the apex bank had slashed its signalling rates to increase liquidity in the system.

“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.

Simply put, the challenge for Indian banks will be to reduce costs and pass on the benefits to both depositors and lenders which envisages reinventing business models constantly as demanded by a rapidly growing and diversified economy.