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Rukmani Vishwanath

MUMBAI, Dec. 2

COMMERCIAL banks have managed to protect their net interest income or `spreads' despite reducing their prime lending rates after the mid-term review of the Credit Policy by the RBI, where the regulator reiterated that banks should bring down spreads wherever they are too high.

Corresponding reductions on interest rates on deposits across maturities has helped them maintain — in some cases even increase — their spreads.

According to the RBI annual report, the average spread of public sector banks last year was 2.73 per cent, which, in fact, was more than that of 1999-2000 at 2.70 per cent. Some banks have spreads of nearly 4 per cent against the international norm of 1.5-2 per cent. Analysts say that ideally, banks need not maintain spreads over 2 per cent on their lending rate.

In the mid-term review of its Monetary and Credit Policy, the RBI said: "In the current environment of low inflation, unreasonably wide spreads could adversely affect the overall credit portfolio of banks.'' The RBI had asked banks to review both their PLRs and spreads and align spreads within reasonable limits around PLR. Banks, however, appear to have taken note of only the first part — "review PLRs''.

When queried on the rationale behind maintaining high spreads, a senior official with a leading public sector bank said, "Banks have to factor in the cost of servicing deposits. Every bank's portfolio has a legacy of high cost deposits.''

"In a falling interest rate regime, banks still have a contractual obligation to pay a high interest on the older long term deposits,'' he said. Bankers contend that although there has been a pick up in bank credit, the quantum growth that is usually visible in corporate credit cannot be seen in retail credit.

According to a bank official, the RBI wants banks to bring down lending rates drastically in order to push industrial credit. A low interest rate regime will undoubtedly pressure lending rates, but banks will consequently also have to bring down deposit rates to prevent asset liability mismatches.

Meanwhile, it has become a losing proposition for depositors with interest rates on domestic term deposits being chopped repeatedly. Other avenues for savings investment are also shrinking.

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