Asserting that there is more scope for banks to lower the lending rates, the Reserve Bank today virtually put the ball in the government's court to ensure better transmission of policy rate reductions by fast-tracking bank recapitalisation and NPA resolution.
"The environment for timely transmission of policy rates to banks' lending rates will be considerably improved" if non-performing assets are resolved more quickly and efficiently, recapitalisation is hastened, and small savings rates are adjusted by fully implementing a formula decided earlier, the RBI said.
As to the banks, "there is still scope for the lending rates to come down further because our policy rates came down by 175 basis points (since January 2015) and weighted average lending rates have come down only by 85-90 basis points", said Governor Urjit Patel, adding "I think there is scope for more transmission."
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Lack of transmission is a prominent worry expressed by RBI in the past two years when it was in accommodative stance.
The government has been blaming the higher rates maintained by the RBI as well as the banks for the slowdown in credit offtake which has hurt the economy.
Patel made these remarks right after announcing a shift in the policy stance to 'neutral' from 'accommodative' today.
Even though a Rs 10,000-crore recapitalisation provision has been made in the Union Budget with an explicit commitment to put in more money, some experts feel it is a small amount given the need. Similarly, political compulsions continue to dominate the small savings interest rates, which force banks to keep deposit rates high.
On NPA resolution, the RBI today stressed the need to devote more capital and operationalise reform measures like the Bankruptcy Code, asserting that the NPA issue is a "twin balance sheet problem" covering both the banks and the corporates.
"I think the problem of NPAs in an absolute sense is quite large and I think it requires a significant recapitalisation of the banking system," the newly-appointed deputy governor Viral Acharya said.
He added that resolution of NPAs will also help tide over the difficulties regarding demand-supply situation and see the banks lend more.
Acharya noted that recapitalisation can help resolve the NPA problem only to some extent, because an equally important reason for the stress in the system is the crisis in the corporate world, caused by over-leverage and underutilisation of installed capacity.
Unless there is revival in consumption demand, stress will remain with companies which in turn will get reflected in the banking system, he said.
His colleague S S Mundra said it is a "twin balance sheet" problem and the RBI has undertaken a slew of measures on the bank balance sheet front.
"The other development in this would be around the Bankruptcy Code which I think would be very important that it becomes operationalised soon," he added.
Mundra said at present, the overall stress in the system stands at over 20 per cent and acknowledged that it is a cause of concern. However there has been some improvement in the recent past and there has been a quarter-on-quarter dip in gross NPAs as of December, he added.
Net NPAs are also coming down which suggests adequate provisioning done by banks, Mundra said.
