Bankers have pointed out that a reduction in transaction costs as suggested by the finance minister P Chidambaram is not feasible step. The minister had recently asked banks to reduce transaction costs in order to facilitate softening of lending rates.
In the recent budget, the finance minister had abolished interest tax and this was expected to provide some relief to the borrowers.
Some banks have reportedly told the Reserve Bank of India (RBI) that achieving a reduction in transaction costs in the immediate future is unlikely.
While making their suggestions to the apex bank for the forthcoming credit policy, Bank of Baroda has pointed out that a reduction in the transaction cost was not feasible.
Bankers said effecting a reduction in transaction costs is difficult for a variety of reasons. First, there is no exit policy in place for paring excess manpower.At the same time, external pressures ensure that the closure of unviable and loss-making branches prove to be difficult. Unlike their foreign counterparts, which offer only specialised services, public sector banks are generally forced to offer a gamut of services to a wide range of customers.
Bankers point out that this is true even in the case of computerised branches. Given these factors, it is difficult to expect a reduction in the transaction costs immediately.The entire thing has to be volume-driven and achieving economies of scale is the only way to reduce these costs.
Most of the banks have decided to wait for the credit policy before deciding on whether to cut their prime lending rates (PLR).
Ramesh Mishra, chairman and managing director, Dena Bank, sums up the mood among the bankers when he says that further reductions in the PLR will be only possible only if there is a decrease in the cost of funds. Union Bank of India (UBI) has been the only bank to reduce the PLR in wake of the exhortations of the finance minister. UBI is using the PLR cut as a marketing tool for attracting blue-chip corporates.
According to A T Pannir Selvam, chairman and managing director, UBI, two factors helped in reducing the PLR to 14 per cent. First, the level of non-performing assets (net) is at around five per cent and recoveries in the last financial has been close to Rs 300 crore.
Only if the banks pay close attention to these factors will they succeed in reducing their PLR.
