Central bank prefers higher deposit and lower lending rates

Asks banks to settle for lower margins, boost efficiency.

The Reserve Bank of India has exhorted banks to improve the country’s savings growth rate by offering higher rates on deposits, even if it means bringing down the net interest margin (NIM).

“The NIM of the Indian banking system is higher than that in some of the other emerging markets, even after accounting for mandated social sector obligations such as priority sector lending and credit support for the government’s anti-poverty initiatives,” the central bank said in the Trend & Progress report on banking released here on Monday. NIM is broadly the difference between the interest earned and interest expenses.

The current term deposit rates are around 9.5 per cent for maturities between one and three years.

The RBI has also said lenders should give out loans at lower rates of interest to boost investment through efficient channelising of savings in the economy. According to the report released by the central bank, the average NIM for scheduled commercial banks on the whole increased to 3.69 per cent in 2010-11 from 3.29 per cent in 2009-10. “While a higher NIM contributes to profitability, it also implies a higher cost of financial intermediation in the economy, which is considered a sign of inefficiency,” the RBI explained.

The central bank also said savings bank deposits may no longer remain a cheap source of funds for banks.

“The upward revision in the savings bank deposit rate from 3.5 per cent to four per cent and deregulation of the interest rate on savings bank accounts may improve savings deposit mobilisation going forward. However, in a competitive environment, with the deregulation of interest rates, savings deposits will be no longer be less expensive as they were in the past,” the RBI said. Following the deregulation, four private sector banks, YES Bank, IndusInd Bank, Kotak Mahindra Bank and Ratnakar Bank, have raised the rate by 150-200 basis points. Public sector banks, which control more than 70 per cent of the deposit market, are yet to announce a hike in their savings bank interest rates.

The RBI noted savings bank mobilisation decelerated in 2010-11 and the shift of funds was towards term deposits, which offered attractive interest rates. While the growth in savings bank deposits was 21.8 per cent in 2010-11 as compared to 26.9 in the previous year, term deposit growth improved to 18.2 per cent from 12.9 per cent.

“An interesting development about the consolidated balance sheet of scheduled commercial banks in 2010-11 was the deceleration in the growth of savings bank deposits and demand deposits with a corresponding acceleration in the growth of term deposits. This could be due to the prevailing higher interest rate environment making term deposits more attractive as compared to demand and savings bank deposits,” the RBI said.

Source: Business Standard