A V Rajwade:: Monetary transmission, base rates and ALM | Business Standard Column

A V Rajwade:: Monetary transmission, base rates and ALM | Business Standard Column

One need to ponder over the concluding paragraph. I quote:

"High interest rates can have two opposite consequences for the banking system: on the one hand, they would help increase the net interest income while, on the other, they also tend to worsen the quality of assets, increasing the level of non-performing assets. No wonder, capital intensive industry and infrastructure projects seem to have a disproportionate share in NPAs."

My response:

October 8, 2015
Base rates basics
This refers to A V Rajwade’s column “Monetary transmission, base rates and ALM” (THE OTHER SIDE, October 8). The article helps us to look around and search for reasons other than the (earlier) adamant approach of RBI to managing base rates. Bad Asset Liability Management (ALM), high NPAs, inefficiency infused by bad HR policies and government interference in conduct of banking business contribute their share in banks’ inability to reduce interest rates on loans.
It is common knowledge that net interest margins(NIM) in India are much higher than the interest rates in some countries. Till RBI obliged by reducing the base rates by 50 basis points on September 29, blame for high cost of credit was put squarely on Monetary Policy. Earlier also stakeholders and analysts were aware that banks are not lending out of funds provided by RBI at Bank Rate. The twist in the story has come when Finance Ministry announced its intention to bring down the return on small savings and PPF balances on the same day RBI announced reduction in base rates.
In industry, if cost of production has to come down, efficiency has to be improved and resources have to be managed well. Banks, which are dependent on savers for their resources, cannot go on reducing deposit rates. Banks will have to prune down their costs, reduce NPAs and where there are policy compulsions to lend, those who force the banks to lend disregarding the norms of prudent banking will have to compensate for the losses.

M G Warrier, Mumbai
M G Warrier


Popular posts from this blog


The King of Ragas: Sankarabharanam