Mumbai: India’s central bank chief said on Friday that banks need to increase their deposit rates and reduce lending rates to accelerate the savings, investment rate and boost a double-digit growth.
“This means banks need to raise the interest rates offered to depositors and reduce the lending rates charged on borrowers - in other words, reduce their intermediation costs, or in technical terminology, reduce the net interest margin (NIM),” Duvvuri Subbarao said in a speech on Friday.
There is a need to raise the level of national savings and channel those into investments to achieve double-digit inclusive growth, he added.
Subbarao said that Indian banks’ NIM was still higher than their peers in other emerging market economies even after accounting for mandated social sector obligation.
“Banks are short of funds and probably the direction that the RBI governor wants to give is to banks to lend more. Since banks don’t have much resources, there is still scope for hike of 25-50 basis points in deposit rates, said Sandeep Shah, head of equity sales and research ar Tower Capital.
Indian bank loans rose 22% on year as of 5 November.
The growth is in line with the central bank’s projection of 20% by March end but deposit growth at 15.3% as of early November lags the central bank’s projection of 18%.
“Once financial inclusion happens, NIM will come down but for the next 1-2 years the transaction cost will remain high and so margins of banks are likely to stay at high levels,” said D.L. Rawal, chairman and managing director of Dena Bank.
Subbarao urged banks to improve their efficiency ratio by optimizing non-interest expenses, which will in turn enable banks to protect their net interest margin.
At the aggregate level, the net interest margin of the Indian banking system has narrowed from 3% in 1999/2000 to 2.5% in 2009/10,” Subbarao said in his speech.