Commercial banks on Thursday told the Reserve Bank of India, during a pre-monetary policy review meeting, that managing high volatility in interest rates is becoming burdensome for them and expected the central bank to smoothen the movement in rates.
Banks told RBI they want a "less volatile" interest rate scenario and also complained of a squeeze in margins in the first quarter of 2006-07 as increase in lending rates had lagged rise in cost of funds, banking source said.
Bank chiefs, under the banner of Indian Banks' Association, met RBI deputy governor Rakesh Mohan as part of the central bank's consultation process ahead of the policy review on July 25, 2006.
V P Shetty, chairman of Industrial Development Bank of India and also IBA, Aditya Puri, HDFC Bank managing director, Naina Lal Kidwai, HSBC India CEO and H N Sinor, IBA chief executive represented the banking sector at the meeting.
The yield on the benchmark 10-year government paper has risen by 80 basis points in the April-June quarter. Banks have had to adjust interest rates frequently and also provide for losses because of fall in the value of investments, the sources said.
Banks have aggressively increased deposit rates by up to 200 basis points since the second half of 2005-006 but have not been able to pass on the cost of funds to borrowers because of intense competition.
Banks had to raise deposit rates to get funds for supporting credit growth but the interest rates on advances have not kept pace, which has put pressure on profitability, bankers said.
Bank deposits grew by 19.7 per cent in April-June 2006 over a year ago, while credit has grown by over 31 per cent growth.
Banks will need to ensure availability of resources to provide for any further growth in the advances and for this, the liquidity in the system should be adequate, bankers said in their wish list to the RBI.
The daily surplus liquidity in the system is about Rs 40,000 crore (Rs 400 billion). The liquidity could get used up in no time if the growth in credit remains high.
Asked if banks sought a cut in the cash reserve ratio to increase lendable resources, a banker said, "decisions regarding CRR pertain to monetary policy, which is the domain of the RBI. Banks did not make any suggestions in this regard."
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