Banks are not passing on the benefit of cut in policy rates to the borrowers, Reserve Bank Deputy Governor K.C. Chakrabarty said today while asking lenders to undertake reforms and bring down their operation costs.

“Within the interest rate structure, if banks increase their efficiency, interest rates will come down. What we call operational efficiency of the banks and that is one thing that should happen”, he said, while talking to reporters on the sidelines of a function here.

Reduction in policy rates, he said, will not serve any purpose unless the banks bring down their spreads and pass on the benefits to borrowers.

“It (interest rate cut) will not happen if you don’t reduce your cost. If the spread does not come down, people will not get the benefit. Unless within the institution there is reform, you will not be able to derive the benefit of policy reform”, the RBI Deputy Chief said.

Reforms were not taking place at individual level, Chakrabarty said, adding “at one stage Cash Reserve Ratio (CRR) was 25 per cent, Statutory Liquidity Ratio (SLR) was 40 per cent. Now SLR has come down to 23 per cent, CRR is 4.5 per cent. People say that it should be abolished. But has this benefit of reduction gone to the people?”

He regretted that the lending rates of banks have not come down in tandem with the reduction in CRR and SLR. On the other hand they have gone up.

“Today repo rate is 8 per cent, CRR is 4.5 per cent, inflation 9 per cent, SLR 23 per cent and PLR (prime lending rate) of banks on an average is 1 per cent higher (than what it was in September 2008).” he added.

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