JOIN USRaise deposit rates & cut lending rates, banks told
“We need to raise the level of national savings and channel those savings into investment. This means banks need to raise the interest rates offered to depositors and reduce the lending rates charged on borrowers,” Subbarao said in his address to the Bancon 2010 here.
The governor said the net interest margins of the banks, which though have came down by 0.5 per cent in the last decade to 2.5 per cent now, continue to be higher than their peers in other emerging markets even after accounting for their mandatory social sector spends.
Banks can maintain profitability by optimising operating costs like non-interest expenses, which include wages and salaries, transaction costs and provisioning expenses, Subbarao said.
“The task for our banks clearly is to press on with efforts for sustainable reduction in operating costs through productivity improvement and skill enhancement and by leveraging of technology,” he said.
Nurturing asset quality, diligent loan restructuring of viable assets and reducing non-performing assets through recovery or upgrade can be the other streams for non-interest costs reduction, he said.
On the need to improve efficiencies, Subbarao, particularly, picked out large-sized banks and said their efficiency should be comparable to global standards.
Flagging the financial inclusion agenda, Subbarao said he is “troubled” that Indian banks see it as an obligation rather than as an opportunity.
“Financial inclusion will provide banks access to sizeable low-cost funds as also opportunities for lending in the small volume segment,” he said, and added that instead of looking at it as an obligation, banks should embrace it as an opportunity that can help them increase their asset base.
However, some banks pointed out that issue of net interest margins should be considered in the context of the sector profitability.
It can be noted that domestic banks in their efforts to maintain better margins and protect profits, pay very low interest rates on deposits, especially on savings deposits, which form a major share of their lendable resources, while charge very high interest rates from borrowers. While savings deposits attract a poor 3.5 per cent, current accounts draw zero returns to the depositor, term deposits vary between 4.5 to 8 per cent, while the average benchmark lending rate is above 7.5 per cent.
Streamline regulations
Further, Subbarao pitched for streamlining banking regulations, saying some were “confusing” even though they served the banking system well. On the existing arrays of laws in the banking sector, he favoured a single legislation to remove inconsistencies.
Subbarao also asserted that the proposed financial sector reforms should be driven more by the sectoral regulator Reserve Bank than by a legislative panel.
“Policy direction should drive the work of the proposed financial sector legislative reforms commission and not the other way around.” He said there is an urgent need to streamline the plethora of regulations governing the banking system in the country. “There is a whole lot confusing laws out there. But it has served the system well by helping maintain an orderly banking system.
The Banking Regulation Act has not only stood the test of time, but several of its provisions have all helped the Reserve Bank in preventing crises and maintaining financial stability”, he said. “But the recent global financial crisis has taught us that our regulations have to change according to the need of the time..”, Subbarao said.
He said the global financial crisis threw up a number of areas requiring significant legislative action either because there is no legislation or because the prevailing legislation is inadequate.