Today the Reserve Bank of INDIA unveiled its June
monetary-policy-review in which it kept the repo-rate unchanged at 6.50% while maintaining
an accommodative stance depending upon the incoming data which in turns depends
to an extent upon the monsoon and food-prices apart from unseasonal
disturbances. The RBI said that it would continue to maintain a liquidity
neutral stance from a deficit mode that it would provide the markets much
liquidity to pass on the rate cut transmission to lenders to increase investment,
but the banks are saying lending rates which are variable could not be decreased
till deposit rates which are fixed go down. But, the commercial banks are
borrowing from the central-bank at 6.5% which is much lower than the current
market lending rates. However, deposits are only one source of liquidity or
money-supply to the commercial banks, others including the interbank-rate and
other financial arms. Therefore, if the cost of fund from the RBI is 6.50 the banks
should decide interest rate closer to 6.5-7% for sectors which are in the list
of strategic or priority lending area such as infrastructure and capital-formation.
The commercial-banks do not charge same price for the services they offer. The
interest rate for short and long lending differ to a considerable degree. The
same is true for the deposits. The banks should recognize that the lending is
more important for the bank’s profit because deposits are an outgo. First you
earn and then pay for the expenses. Lending represents the income side and
deposits the cost side. You income decide you expenditure. The banks should
realize that they are not the government which first decides expenditure and
then the sources of revenue, they need to decide the lending rates first and
then the deposit-rates which is always a tad lower than the lending rates which
increases investment and bank’s profits. Banks profitability is constrained by
higher lending rates; moreover high deposit rates are increasing the cost. The
banks themselves are responsible for recession by not reducing interest rates
and increase demand. Nonetheless, banks are also hurt by NPAs, but higher rates
would also lower credit growth and profits by banks. They are waiting for the
signal from the RBI when they themselves can increase their business by
lowering the price of their products. The commercial banks has held the economy
away from recovery by not reducing rates when the controller wants them to so.
The banks so far have been saved from competition from foreign banks which has
left them with a choice not in favor of the economy when they can use lower
prices and increase their own business and start recovery in the economy. Many
already know that banks shares enjoy appreciation even when the repo-rate is cut
or increased, when the repo-rate is cut and banks lower interest rate it
increases business and when it is hiked it increases their profits. Banks are almost
always in profits because of the protection of the central-bank. Even-when the
RBI is a controller of commercial-banks they are not following its signals and
communication for which the RBI might need to become more diplomatic by
increasing competition to higher degree by inviting foreign banks to invest in
INDIA. Repo-rate cuts are not being translated in to lower lending –rate. How
else the RBI may help banks to lower lending-rates and increase their business?
It is little absurd when the Indian economy needs more investment and growth.
Banks are holding the recovery of economy for ransom…
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