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Tuesday, Apr 02, 2002

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Money & Banking - Interest Rates

`Further rate cuts difficult unless costs come down'

Our Bureau

MUMBAI, April 1

THOUGH the real interest rates in the economy are still high, banks will be unable to bring down lending rates further unless their transaction costs are also reduced, Mr Janki Ballabh, Chairman, SBI, has said.

``The prime lending rate (PLR) has become irrelevant these days as good borrowers demand funds at much lower rates-- linked to yields on government securities. Over the past 4-5 years, PLR has come down by around 400 basis points,'' he said addressing a gathering of bankers at the CII, Banking summit 2002, here today.

The Fixed Income Money Markets and Derivatives Association (FIMMDA) fixed the average 10-year government paper yield at 7.36 per cent which is down by 270 basis points from the level of 10.06 per cent last year. State Bank of India has cut its prime lending rate by 50 basis points to 11 per cent from 11.50 per cent with effect from April 1, 2002. The bank also cut deposit rates across maturities by 25 basis points.

Mr Ballabh said "the high fixed overhead costs that banks have to bear translate into higher interest rates.'' Cost of services must be brought down and one way to do it is by bringing down the transaction costs of banks and this can be done only with the help of technology'', he said.

Technology has to be gainfully deployed to build business volumes and this area is a major challenge for banks, he said. Addressing the issues of non-performing assets, Mr Ballabh said, that conventional methods are no longer proving useful in stemming the growth of NPAs and in the aiding of recoveries.

New strategies like corporate debt restructuring, setting up of the Asset Reconstruction Committee and the enactment of foreclosure laws etc need to be implemented.

Risk management therefore becomes an important area of focus for banks.

"While the ratio of gross NPAs to total loans have been coming down, the quantum is in fact increasing'', he said.

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