RBI wants banks to raise deposit rates, reduce operating costs

The Reserve Bank of India (RBI) wants banks in the country to raise the interest rates offered to depositors and reduce lending rates charged on borrowers by reducing their intermediation costs or net interest margin (NIM).

For maximising national savings and for the Indian economy to achieve a double-digit growth, it is imperative that banks reduce their lending costs while at the same time rewarding depositors, RBI governor D Subbarao said today.

At the aggregate level, the net interest margin of the Indian banking system has narrowed from 3 per cent in 1999-2000 to 2.5 per cent in 2009-10. While Indian banks can justifiably be proud of this record of achievements, they can't rest on those laurels, he said.

The efficiency gap between Indian and foreign banks is still very wide that the most important task for Indian banks is to further improve operating efficiency by optimising operating costs, ie, non-interest expenses, including wages and salaries, transaction costs and provisioning expenses. This will enable banks to lower lending rates while preserving their profitability, he said.

While there has been a significant improvement in terms of the standard supervisory parameters such as capital, asset quality, management, earnings, liquidity and systems, the net interest margin of the Indian banking system is higher than that in some of the other emerging market economies.

This is so even after accounting for mandated social sector obligations such as priority sector lending and credit support for the government's anti-poverty initiatives, the governor noted.