Letters: Base rate basics | Business Standard Letters

Letters: Base rate basics | Business Standard Letters

Business Standard, October 9, 2015
Base rate basics
A V Rajwade's column, "Monetary transmission, base rates and ALM" (October 8), helps us look for reasons beyond the earlier adamant approach of the Reserve bank of India (RBI) in managing base rates. Bad asset-liability managing non-performing assets (NPA), inefficiency infused by bad human resource policies and government interference in the conduct of banking business contribute to the inability of banks to reduce interest rates on loans.

It is common knowledge that net interest margins in India are much higher than those in some other countries. Till the RBI obliged by reducing base rates by 50 basis points on September 29, the blame for high credit cost was put squarely on the monetary policy. Earlier too, stakeholders and analysts were aware that banks were not lending out of funds provided by the RBI at bank rate. The twist came when the finance ministry announced its intention to cut the return on small savings and public provident fund balances on the day the RBI announced a reduction in base rates.

In industry, for cost of production to dip, efficiency has to improve and resources have to be managed well. Banks, dependent on savers for their resources, cannot go on reducing deposit rates. They have to prune their costs, reduce NPAs and where there are policy compulsions to lend, those who force banks to lend disregarding the norms of prudent banking, will have to compensate for the losses.

M G Warrier Mumbai


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