State Bank of India (SBI) Chairperson Arundhati Bhattacharya has done some plain-speaking by saying that the Reserve Bank of India's (RBI) draft norms on marginal cost of funds are not feasible (Business Standard, December 4). She has also called the repo rate "a blunt instrument" in deciding the interest rate.
I fully agree with her when she says that not many banks depend on borrowings from the RBI for their lending operations; instead, they raise funds by way of deposits. Hence the reduction in repo rate by the RBI cannot be passed on to borrowers straightaway.
Since the funds already lent at a higher rate might have been raised as deposits carrying higher rate of interest, cutting the lending rate for these borrowers will put the net interest margin of the bank under pressure. This will adversely affect the bank's profitability. Bhattacharya is fully justified in suggesting that the reduced interest rates be applicable only to new lending; for existing borrowers, the rates should be effective after a certain period of time.
A corollary to her stand is that when interest rates on loans are reduced, banks have to cut the interest rates on deposits to maintain their net interest margin. This will be to the detriment of retail depositors, especially retired personnel, who might have put their retirement benefits into bank deposits to earn sufficient interest for their sustenance.
I hope the RBI takes depositors' concerns into consideration while announcing the credit policy. If it does not, depositors might be lured by fly-by-night operators offering higher rates of interest and end up losing their principal amount too.
The RBI should take Bhattacharya's comments in the right spirit. The SBI's earlier chairman, O P Bhatt, had done some similar plain-speaking on "teaser loans", which the RBI did not appreciate.
B C U Nair, Alappuzha
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