The Hindu : Business : 'Pass on the benefits of low cost deposits to customers'

Online edition of India's National Newspaper
Tuesday, Aug 31, 2004

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Business

'Pass on the benefits of low cost deposits to customers'

By Our Special correspondent

MUMBAI, AUG. 30. The Reserve Bank of India today stated that the persistence of the large gap between lending rates and deposit rates remains a matter of concern. It urged the banks to ensure that the benefits of low cost deposits are passed on to the customers.

"Policy related barriers to reduction in the lending rate such as statutory pre-emptions and small saving interest rates have been eased considerably in recent years and asset quality has also improved. With almost all the structural rigidities have been reduced, the bank level efforts are now necessary to ensure that the benefits of low cost deposits are to be passed on to the customers,'' the RBI stated in its Annual Report 2003-04, which released today.

Bank loans continue to be special in the Indian economy. This raises several issues in relation to credit culture, credit delivery and credit pricing. "There is the issue of stepping up loans to relatively disadvantaged sections of borrowers, including small and medium enterprises and the agricultural sector. To many of the borrowers in these sectors, it is, in fact, the availability of credit more than the price of credit, which is of prime importance. This is especially so because interest rates in informal markets which serve as an alternative to bank finance, particularly in rural areas, are sometimes at usurious levels relative to the formal sector. The persistence of this large differential, ipso facto, implies that the formal credit mechanisms are not able to penetrate into the informal system.

Price pressures

<167,1p,1>The RBI stated the outlook for headline inflation is, on current indications, less optimistic than what was envisaged at the beginning of the year. Price pressures could be a cause of some concern though it remains to be seen how the imported price shocks would evolve globally and be absorbed domestically. The comfortable level of foreign exchange reserves, however, provides the wherewithal for ensuring adequate supplies and for moderating inflationary pressures on the common man.

It is relevant to note that inflation, as measured by the year-on-year changes in the consumer price index (for industrial workers), on a point-to-point basis, was 3 per cent in June 2004 and 3.4 per cent on an annual average basis.

The consumer price index does not, to the same extent, reflect the price pressures from iron and steel and mineral oils because of the relatively low weight of these items in this index.

In any case, the inflation environment needs to be monitored closely on a continuous basis for any unforeseen developments either in the global or in the domestic environment, with a view to considering prompt as well as measures responses, as appropriate.

GDP growth

<167,3p,1>On current indications, while the prospects for GDP growth continue to be bright, in particular, due to a possible acceleration in growth of world output and enhanced domestic investment activity, there are also downside risks emanating from uncertain monsoon as well as the possible persistence of high and uncertain oil prices.

These risks impart an element of downward bias to the estimates of GDP growth made at the beginning of the year but evolving strengths during the rest of the year may restore the position and in any case India will continue to be among the top performers globally.

In the annual policy the RBI stated in last May that the GDP growth was expected to be at 6.5 to 7 per cent for 2004-05.

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