Mumbai, Sept. 18: Hours before the State Bank cut its base rate, Reserve Bank of India deputy governor K.C. Chakrabarty slammed banks for not passing the benefits of the RBI’s policy rate cuts to their borrowers in the form of lower lending rates.
“What we are saying is that policy rate has to be transmitted. If you don’t transmit, policy rates will not serve the purpose,” Chakrabarty told reporters on the sidelines of a function in the capital today.
The remarks come just a day after the central bank left its policy rate (the repo) unchanged at 8 per cent, but reduced the cash reserve ratio (CRR) by 25 basis points. Various banks have indicated that they are planning to bring down their lending rates consequent to the relaxation in CRR. Cash reserve ratio is that portion of bank deposits which must be maintained with the RBI. On the other hand, the repo is the rate at which the RBI provides funds to banks against collateral.
He said banks were obsessing about costs and that was one of the reasons why they were not passing on the benefits of the policy rate changes to their borrowers.
The central bank has often pointed out that intermediation cost in the Indian banking system is high by global standards. It has, therefore, been calling for banks to bring down their spreads. “If the spread does not come down, people will not get the benefit,” Chakrabarty added.
Stating that banking costs will come down if the lenders improve their efficiency, the RBI deputy governor said that while statutory liquidity ratio (SLR) had come down to 23 per cent from 40 per cent and the cash reserve ratio to 4.5 per cent from 25 per cent, benefit of such a reduction on the borrowers was not evident.
“At one stage CRR was 25 per cent, SLR was 40 per cent. Now SLR has come down to 23 per cent, CRR is 4.5 per cent. People say that it should be abolished. But has this benefit of reduction gone to the people,” he asked.
The RBI deputy governor said the prime lending rate (PLR) of large banks was around 15 per cent in September 2008 when both the repo rate and CRR stood at 9 per cent. The PLR of banks is now around 1 percentage point higher than in 2008 even though the repo rate, CRR and SLR have been cut.