Mumbai: Banks should work towards improving transparency and transmission of monetary policy to the end citizen, said RBI, deputy governor, Viral Acharya.
While delivering a lecture on Monetary policy transmission at the first Aveek Guha Memorial lecture, he said, “Monetary policy transmission is not working as one would like it to. It is time to change the internal benchmark to make them less discretionary and more prescriptive but still with discretion that banks start putting.”
Acharya revealed that this change in banking can only be done after we know that economy can absorb the shock. At present, RBI is collecting recommendation on this. He pointed out that most banks chose to keep saving deposit rates unchanged and ignoring completely the monetary policies. “Major banks kept their saving rates unchanged at 4 per cent between October 2011 to July 2017,” he added, referring to RBI study. This was the same for almost six-year period even as the Reserve Bank’s policy rates changed significantly over this period. He made it a point to talk about the deteriorating health of banks due to its worsening asset quality. He continued, “This has reduced banks’ capacity to bear losses in fresh loans.” He explained that banks are keen to earn high margins on these fresh loans.
“In effect there is a cross subsidisation of margins that are earned on new loans against the losses that are going to happen in legacy bad loans as stressed assets are presently quite high.” He reiterated lending rates are high compared to deposit rates. Adding to all this, is the competition banks are facing from alternative financial instruments like mutual funds and saving schemes.
