Administered rates distort structure: Reddy

Reserve Bank of India Governor Y V Reddy has said administered rates distort the interest rate structure and blunts the efficacy of the monetary policy.

He was speaking on the occasion of the Foundation Day of the Institute of Development Studies, Jaipur, on June 30. However, the speech was placed on the RBI website today.

Reddy said there has been some tendency in recent times to widen the net of administered interest rates to cover bank loans for agriculture. But this system is less than satisfactory, he said.

Speaking on the constraints of the monetary policy, Reddy said, "There is a public perception that banks' risk assessment and risk management processes are less than appropriate and sub-optimal and that there is under pricing of credit for corporates, while there could be overpricing of lending to agriculture and the small scale industries.''

"In addition to formal prescription of interest rates, public sector banks, which account for over 70 per cent of banking assets, are called upon by the majority shareholder to discharge social obligations to reflect public policy priorities,'' added Reddy.

While the initiatives in the public sector, in some cases, add to the effectiveness of the monetary policy intent, they could operate in the opposite direction also, especially when the perceptions and relative weights accorded to credit expansion, price stability and financial stability by the government and RBI significantly differ.

In a financial system, where banks play a dominant role in non-banking activities also, the transmission of monetary policy through both credit and monetary channels is also impacted in this environment, he said.