Ill at ease

Mumbai, Dec. 17: The Reserve Bank of India today indicated that banks were reluctant to pass on the benefits of the relaxations in monetary policy to customers.

It asked them to carry out a careful review of their lending rates based on the changes in the inflation outlook, domestic liquidity conditions and their cost of funds.

In its Report on Trend and Progress of Banking in India, the RBI said the benchmark prime lending rates showed “upward flexibility’’ during monetary tightening, but there was “downward rigidity’’ during monetary easing, thereby impeding the monetary transmission mechanism.

This means banks were quick to raise interest rates when the RBI tightened its monetary policy but were slow to trim them when it was relaxed. “These rigidities do not allow the benefits of easy liquidity conditions to be passed on to the borrowers,’’ it said in its report.

The RBI has taken a host of measures in recent times that include a cut in the cash reserve ratio apart from reductions in the repo and reverse repo rates to boost the economy. While nationalised and few other banks have brought down their benchmark rates, some private sector banks have so far desisted from passing on the benefits to their customers.

The report also cautioned banks against a possible increase in their non-performing assets (NPAs). There has been a surge in the banks’ gross NPAs in absolute terms.

In 2007-08, the gross NPAs increased 12 per cent, reversing the declining trend noticed since 2001-02. Gross NPAs of the banking system rose to Rs 56,435 crore as on March 2008 from Rs 50,299 crore in the previous year.