RBI warns banks against distorting its interest rate policy
20 February 2015
The Reserve Bank of India (RBI) has admonished banks for distorting its interest rate policy and failing to pass on the benefits of interest rate reductions, although small, despite the central bank extending unlimited credit facility to the banking sector under the liquidity adjustment facility (LAF).
Commercial banks in the country use RBI's overnight lending window to borrow heavily only to lend at much higher rates, making a ''mockery'' of its open market lending operations, RBI Governor Raghuram Rajan said.
Readily borrowing from the central bank at the policy rate and then lending that money out at a high rate can only be described as "lazy banking," Rajan added.
He said banks should ensure that the effects of the interest rate policy changes trickle through onward lending by banks, otherwise the RBI will be forced to rethink its policy of extending unlimited credit to banks.
Only three of the country's 45 commercial banks have cut base lending rates despite the RBI`s monetary easing this month.
Banks benefit even from small doses of interest rate reductions as they handle large volumes and they can surely pass on the benefits to retail and corporate borrowers at a time when the economy is only gradually recovering from a slowdown, Rajan pointed out.
Moreover, Governor Rajan believes in banks managing their assets better and more efficiently than relying on outside funds, and the RBI is looking at reducing banks' excessive reliance on overnight funding, as part of reforming Indian money markets.
Banks roll on overnight borrowings to fund longer-term lending and these rates are often volatile.
Although tight liquidity is constraining banks' lending operations, banking sources say the RBI is adamant it will not inject additional liquidity after loosening the statutory liquidity ratio further to give banks more available cash.
Meanwhile, RBI data on the composition and ownership of deposits with scheduled commercial banks showed that current, savings and term deposits comprised 8.9 per cent, 26.2 per cent and 64.9 per cent, respectively, of the total deposits as of March 2014.
'Household' sector with 59.7 per cent share in total deposits was the largest contributor in total deposits in March 2014, followed by government and private corporate sector contributing 14.0 and 9.9 per cent, respectively.
Metropolitan branches followed by urban and semi-urban branches continued to lead deposit generation by SCBs mainly in the form of term deposits. In rural branches, savings deposits dominated, followed by term deposits.
Bank group-wise, public sector banks accounted for the largest share (74.1 per cent) in total deposits in March 2014 followed by private sector banks (18.8 per cent).