How To Reduce Interest Rate

I would like to ask CEOs of bank to suggest the ways to help cut in deposit interest rate and then cut in lending rate.Most of the senior officials of Banks are engaged in just flattery to ministers and RBI officials .They do not have their own ideas and views and if they have they do not have courage to put them before Ministers and RBI.Majority of top bankers are interest in their personal career only even at the cost of bank's health.

It is also a fact that banks may not reduce interest rate only by reduction in Repo rate or Bank rate or CRR cut. They may not bear the consequences of cut in deposit rate permanently even when RBI starts paying interest on CRR fund. During last one year RBI has brought down Repo rate to a great extent, but bankers could not cut their interest rate. Banks are though free to cut in deposit rate or lending rate , but they cannot do it .

If bankers really want cut in deposit rates they will have to enhance their CASA volume and for this purpose they will have to improve customer service. It is only the share of CASA which enables the banks reduces lending rate under present scenario. If they reduce rate on savings deposits they will lose their depositors and hence face erosion in growth and hence the capacity to reduce lending rate. 

Few private banks have already adversely affected the CASA of public sector banks because interest rate offered by private sector banks is higher than that by public sector banks. Banks will have to make effort to increase their base of CASA to reduce lending rate. 

Advantage of rise in CASA business and reduction is lending rate in gradual way is that there will be addition of more and more customers in their fold.   IN brief, when lending rates are lowered by banks, they will get additional CASA by addition of more and more corporate business.

 Secondly option is that RBI will have to take back freedom given to banks for deciding their own interest rate structure and RBI in turn will have to decide uniform national structure keeping in view the economic situation of the country, saving rate, external situation, foreign debts, current account deficit, asset liability mismatch, inflationary pressure etc. 

RBI will in this way get success in stopping inter bank rate rivalry and stop transfer of loan  accounts from one bank to other on the ground of lower lending rate. 

If uniform rate structure is envisaged and stipulated by RBI, Banks will stop giving concession to borrowers sacrificing the profitability of banks. RBI thus will be able to force banks to focus on those sectors for which lending in more important in the interest of nation. They will be able to stop multiple financing and excess financing to ill-motivated borrowers and thus help in reduction of bad loans too.

As soon as the uniform rate mechanism put in place by RBI, bankers will stop inter bank rivalry in interest rate competition and will focus in their standard of customer service to attract more and more saving depositors and more and more business men to improve their current deposit share. As CASA improves, profitability of banks will start improving.

Lastly banks will have to improve quality of lending so that ratio of nonperforming assets i.e. NPA comes down and the burden of provisioning is reduced. Banks will have to remove and punish those bank officials who are engaged sanctioning new loans after taking bribe and who are busing in making personal money in the name of target fixed by Banks and Ministry . Banks will have to stop giving promotion to flatterers and bribe earners  and those who extend red carpet welcome to executives and who are real enemy of bank's health.

Further government will have to empower banks, make their legal system tight and effective, force the police and administrative machinery to help bank in recovery of loan from recalcitrant borrowers and punish advocates, valuers, judges, magistrates and police officers who in nexus with bad borrowers do not help banks in recovery of loan , rather help bad borrowers and thus contribute in rise of bad debts and increase in provisioning load .

Government will have to stop misuse of banks for political gain. They will have to put indirect or direct pressure on banks for financing to business houses of their choice and they will have to stop recommending waiver of loan of borrowers whom their ministers and political workers like. They will have to stop building pressure on reduction of NPA through the route of compromise settlement with bad borrowers for political advantage.

Here It is important to point out that a few years ago , i.e. almost upto the year 2010 most of public sector banks use to book considerable growth in business and growth in profit .  

Why?

Even though banks use to offer higher and higher rate on bulk deposits and offer Sub PLR rate on loans they sanctioned to corporate and retail sector. Higher rate on deposit and lower rate on lending was the key to success upto the year 2010. RBI and Ministry of finance could not understand this magic of bankers at least upto the year 2010.

If any honest and skilled office investigates to find out the reason behind such magical growth despite mismatch in interest rate, they will find that bankers at the helm of affairs are in general are fraudulent minded. They are good manipulators of balance sheet. They know the art of window dressing in deposits. They know the art of increasing advances in the month of March to achieve the target to get the appreciation of Ministry.

Almost upto the years 2010 i.e. upto the time of implementation of CBS technology in banks, majority of bankers thought it wise to ignore RBI prudential norms for income recognition and asset classification. They use to teach subordinate and guide them in business meeting not to declare any advance account as NPA till they verbally allowed them to do so. If any Branch head declared advance account as NPA as per RBI norms, he was punished by rejection in promotion process and by transferring his services to remote and critical post. They treated all advances standard and hence did not need making any provision towards bad debts, they saved  provision in maintaining   NPA coverage ratio and they save loss of money towards waiver of loan or sacrifice in compromise settlements.

If the accounts are standard, provision will be nil and profit will be more. This was the key behind magical growth in deposits, advances and profit of the banks upto the year 2010 despite higher rate on deposits and lower rate on advances. In addition bankers did not make adequate provision towards future liabilities arising out of pension load, terminal benefits accrued to staff and other relevant expenses. They knew the art of gifting team of Chartered Accountants to get Certification from them they every rules are followed and every policies of RBI are complied in true spirit  so far as asset classification and income recognition are concerned.

Obviously all problems started when reality started coming on the surface when RBI built pressure on bankers to use technology in identification of NPA and maintain adequate provision to adhere to RBI stipulated NPA coverage ratio. Problems got aggravated when RBI tightened the screw of bankers who indulged in large scale restructuring to conceal bad assets. And now banks are appearing as sick in public domain, bankers are making false excuses to hide their fraudulent culture and corrupt practices. Now they say that global recession and high rate regime are prime cause for their lower profit and lower credit growth.

This is why I use to say that if doctors fail to identify the real character of sickness, the diagnosis prescribed by doctors will also be useless and ineffective. This is happening in banking industry too. Every top banker is accusing RBI for not reducing interest rate. But I have no hesitation in saying that until true reasons are identified, none of regulators can stop sickness of banks going from bad to worse. 

Freedom given to public sector banks may prove fruitful only when majority of top bankers are honest, devoted , skilled and effective.It is sad that the environment in these banks is not conductive to growth but only promote flattery and bribery. 

Under the same reformation era and under same freedom granted to banks, it is pertinent to point out here that private banks are prospering year after year, their profit is on increasing trend, their gross NPA ratio is much less than their counter part in government sector, their business has grown and has posed a challenge to hundred year old bank like SBI, their share value is more, their earning per share is more , their PE ratio is more, their client base is more and productive  and so on .........................  Why "  Only because majority of officials and workers in these private banks are sincere, devoted, loyal ,honest and performer unlike their counter part in public sector banks.


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No Cut In Deposit AND Lending Rate

Deposit, lending rate cuts unlikely, say bankers-Business Line

MUMBAI/CHENNAI, JUNE 17:  

There is little room for banks to cut either deposit or lending rates as the Reserve Bank of India left key policy rates unchanged in its mid-quarter review of monetary policy.

The repo rate and cash reserve ratio (CRR) continue at 7.25 per cent and 4 per cent, respectively.

Amid global uncertainty, high food and fuel inflation and widening current account deficit (CAD), banks are unlikely to reduce interest rates, say bankers. Here is what they said:

S. S. Mundra, CMD, Bank of Baroda: As expected, the RBI has kept the policy rates unchanged.

The guidance shows that there is little room for further cut in the interest rates going forward.

Clearly, things guiding the next policy will be the movement of food prices, measures taken by the Government on improving the CAD and global commodity and fuel prices.

Banks will have to now watch inflation, the rate of accretion in deposits and the ability to contain the cost of deposits.

This will help us assess if there is an enabling situation to cut interest rates on the deposit or lending side. As of now, the elbow room to cut rates is limited.

Vijayalakshmi R. Iyer, Chairperson and MD, Bank of India: The status quo maintained by the RBI was on expected lines. Currency depreciation and high currency account deficit are the main reasons for the rates being left unchanged.

Liquidity is under control, hence, the CRR has been left untouched.

The earlier rate cuts have also not seen much transmission by the banks on the deposit and lending rates. Also, the credit demand has not picked up as the economy still looks slow. So, the RBI will have to wait and watch for now as there is also a lot of volatility in the market.

M. Narendra, CMD, IOB: Banks may not be able to bring down their base rates till such time their cost of resources fall significantly. The deposit rates are still ruling high.

More clarity is expected to emerge on possible tapering off of the quantitative easing by the US Fed, which would give a clear direction and stability to the rupee.

The deposits and credit growth in banks will begin to improve at a speedier pace only in the second half of the year.

The onset of an early monsoon and its progress so far are likely to contribute to growth in the agricultural sector significantly, which may simultaneously ease pressure on food inflation.

The recent measures taken by the RBI and the Government to slow down gold imports and likely reforms in FDI in selective sectors will have a positive impact on the current account deficit.

Shailendra Bhandari, MD and CEO, ING Vysya Bank: The RBI, as expected, has kept the key rates on hold.

While the tone was cautious, and argued for evidence of sustained reduction in inflation before further easing, our sense is that with few signs of economic recovery, we could see a re-examination of this stance, perhaps as early as July.

Of course, any volatility in exchange rates may work against early easing.

Shyam Srinivasan, MD and CEO, Federal Bank: Progressive reduction in inflation and deposit rates continuing at elevated levels have been positives for depositors.

With the monsoon progressing well and with softening global commodity prices, we expect inflation to continue on its southward journey. This is likely to lead to a situation of ‘durable receding of inflation’ and should pave the way for monetary easing in the short to medium term.

As inflation trends down and increases possibility of rate cuts, both depositors and borrowers are likely to begin seeing positives.

Abheek Barua, Chief Economist, HDFC Bank: The absence of cuts in the repo rate and CRR hardly came as a surprise.

We still believe there is the possibility to cut rates by 50-75 bps over the remaining part of the year.

We also wouldn’t rule out the possibility of a couple of cuts in the CRR down the road as liquidity would tighten as we enter the second half of this fiscal.

http://www.thehindubusinessline.com/industry-and-economy/banking/deposit-lending-rate-cuts-unlikely-say-bankers/article4823772.ece