RBI REMINDER TO BANKS: INCREASE DEPOSIT RATES, CUT LENDING RATES

The Reserve Bank today again prodded banks to raise deposit rates to encourage people to save more and put the Indian economy on sustained double-digit growth and lower lending rates by cutting on salaries, wages and transactions costs.  At a meeting of the Institute of International Finance (IIF), a global association of financial institutions, RBI Governor D Subbarao also said that the central bank will come out with its views on the Malegam Committee report on micro financial institutions (MFIs) that favours a 24 per cent cap on interest rates charged by these entities, by April-end.  The central bank governor further said that the RBI will see business plans on financial inclusion of those interested in banking license.  “For double-digit growth that we aspire to, we need to save so that we can invest more and for that to happen, we need to encourage savings, which means that banks will have to increase the interest rates that they offer to depositors and they have to reduce the interest rates that they charge to borrowers,” Subbarao said.  In technical terms, he said banks have to bring down their net interest margin (NIM). This is not the first time that the RBI is asking banks to increase deposit rates. It has been asking banks to do so to retain their depositors, since rising inflation sees net earnings from deposits going into the negative zone.  Subbarao said to cut lending rates, banks have to reduce non-interest expenses like wages and salaries, transaction costs, provision costs, NPAs and enhance productivity by leveraging on technology.  He said Indian banks need to do lots of catching up with their counterparts in peer group countries.