Banks not passing benefits of rate cut, says Chakrabarty

Written by fe Bureau | New Delhi | Updated: Sep 19 2012, 07:41am hrs
Borrowers will be able to realise full benefits of any policy rate cut only when banks improve their operational efficiency through their internal reforms and then pass it on to customers in the form of lower interest rates, according to Reserve Bank of India deputy governor KC Chakrabarty.

Blaming banks for not bringing down interest rates, Chakrabarty said, Within the interest rate structure, if banks increase their efficiency, interest rates will come down... It (interest rate cut) will not happen if you (banks) dont reduce your cost."

"If the spread does not come down, people will not get the benefit. Unless within the institution there is reform, you will not be able to derive the benefit of policy reform," he added.

He said: At one stage, cash reserve ratio (CRR) was 25% and statutory liquidity ratio (SLR) was 40%. Now, SLR has come down to 23%, CRR is 4.5%. People say it should be abolished. But has this benefit of reduction gone to the people

He said instead of the lending rates of banks seeing a fall on the lines of cuts in SLR and CRR, the rates have actually witnessed an increase.

The prime lending rate (PLR) of banks was 13.75-15% in September 2008, even as the SLR was 25% and the CRR and repo rate CRR were 9%, he said, adding, Today, repo rate is 8%, CRR is 4.5%, inflation 9%, SLR 23% and PLR of banks on an average is 1% higher (than what it was in September 2008).

RBI had on Monday declined to cut key policy rates citing high inflation, but at the same time brought down CRR to infuse R17,000 crore worth liquidity into the system.

On the economy in general, he said though several measures need to be taken by the Centre, state governments and RBI, individual institutions also must improve business processes and bring reform to help the benefits of the reforms reach the common man.

On inflation, he said, I dont think we will be able to (achieve the target of) 5% inflation with 5% core manufacturing inflation. Core inflation needs to be brought down to 1-2%, services inflation needs to be brought down to 1-2% and it cannot be done by the government.

Chakrabarty opined that inflation in the services and manufacturing sectors can be reduced through use of appropriate technology.