Banks are not passing on the benefit of cut in policy rates to the borrowers, Reserve Bank Deputy Governor K. C. Chakrabarty said on Tuesday while asking lenders to undertake reforms and bring down their operation costs.
“Within the interest rate structure if banks increase their efficiency, interest rates will come down. What we call operational efficiency of the banks, and that is one thing that should happen,” he said, while talking to reporters on the sidelines of a function here.
Reduction in policy rates, he said, would not serve any purpose unless the banks brought down their spreads and passed on the benefits to borrowers.
“It (interest rate cut) will not happen if you don’t reduce your cost. If the spread does not come down, people will not get the benefit. Unless there is reform within the institution, you will not be able to derive the benefit of policy reform,” the RBI deputy chief said.
Reforms were not taking place at individual level, Dr. Chakrabarty said, adding that “at one stage, the Cash Reserve Ratio (CRR) was 25 per cent and the Statutory Liquidity Ratio (SLR) 40 per cent. Now, the SLR has come down to 23 per cent and the CRR is 4.5 per cent. People say that it should be abolished. But has this benefit of reduction gone to the people?”
He regretted that the lending rates of banks had not come down in tandem with reduction in the CRR and the SLR. On the other hand, they had gone up, he added.
“Today, the repo rate is 8 per cent, the CRR 4.5 per cent, inflation 9 per cent, the SLR 23 per cent and the PLR (prime lending rate) of banks, on an average, is one per cent higher (than what it was in September, 2008),” he added.
Reforms, Dr. Chakrabarty said, were also needed at various levels, including at the Centre, State governments and the Reserve Bank, to bring down the high inflation rate. “My view is that a lot of things need to be done at the government level, the State government level and at the RBI level,” he said, adding that “it (reform) has to be done by individual institutions.’’
He said individual institutions “must improve business processes and bring reform and then only we can adhere to 5 per cent inflation target and, thereby, bring macro-economic stability.’’ Referring to price situation, Dr. Chakrabarty said: “We do not see food inflation to be low because there is problem of food across the globe. We do not see fuel inflation going to be low because there are geopolitical issues.’’ However, he added, inflation in services and manufacturing sectors could be brought down through the use of appropriate technology.
“I don’t think we will be able to have 5 per cent inflation, with 5 per cent core manufacturing inflation. Core inflation needs to be brought down to 1-2 per cent, services inflation needs to be brought down to 1-2 per cent, and it cannot be done by the government,” Dr. Chakrabarty said. The wholesale price index-based inflation in August rose to 7.55 per cent from 6.87 per cent a month ago. The retail inflation during the month moved up to 10.03 per cent from 9.86 per cent in July. — PTI
