New Delhi : Banks are not passing on the benefit of cut in policy rates to the borrowers, Reserve Bank Deputy Governor K C Chakrabarty said today while asking lenders to undertake reforms and bring down their operation costs.

“Within the interest rate structure, if banks increase their efficiency, interest rates will come down. What we call operational efficiency of the banks and that is one thing that should happen”, he said, while talking to reporters on the sidelines of a function here.          Reduction in policy rates, he said, will not serve any purpose unless the banks bring down their spreads and pass on the benefits to borrowers.

“It (interest rate cut) will not happen if you don’t reduce your cost. If the spread does not come down people will not get the benefit. Unless within the institution there is reform, you will not be able to derive the benefit of policy reform”, the RBI Deputy Chief said. Reforms were not taking place at individual level, Chakrabarty said, adding “at one stage Cash Reserve Ratio (CRR) was 25 %, Statutory Liquidity Ratio (SLR) was 40 %. Now SLR has come down to 23 %, CRR is 4.5 %. People say that it should be abolished. But has this benefit of reduction gone to the people?”

It (interest rate cut) will not happen if you (banks) don’t reduce your cost. If the spread does not come down people will not get the benefit. Unless within the institution there is reform, you will not be able to derive the benefit of policy reform”  K C Chakrabarty

Reserve Bank of India Deputy Governor

He regretted that the lending rates of banks have not come down in tandem with reduction in the CRR and SLR. On the other hand they have gone up, he added.

“Today repo rate is 8 %, CRR is 4.5 %, inflation 9 %, SLR 23 % and PLR (prime lending rate) of banks on an average is 1 % higher (than what it was in September 2008)”, he added.

Reforms, Chakrabarty said, were also needed at various levels including at the centre, state governments and Reserve Bank, to bring down the high inflation rate.

 “My view is that a lot of things need to be done at government level, state government level, at RBI level,” he said, adding,            “it (reform) has to be done by individual institutions”.

 He said individual institutions “must improve business processes and bring reform and then only we can adhere to 5 % inflation target and thereby bring macro-economic stability”.

Referring to price situation, Chakrabarty said: “We do not see food inflation to be low because there is problem of food across the globe. We do not see fuel inflation going to be low because there are geopolitical issues”.

However, he added, inflation in services and manufacturing sectors can be brought down through use of appropriate technology.

“I don’t think we will be able to have 5 % inflation, with 5 % core manufacturing inflation. Core inflation needs to be brought down to 1-2 %, services inflation needs to be brought down to 1-2 % and it cannot be done by the government,” Chakrabarty said.

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