Cut lending rates and raise deposit rates: RBI governor

Mumbai: Reserve Bank of India (RBI) governor D Subbarao today asked banks to hike deposit rates and lower the lending interest to improve their efficiency to the level of their global peers, reports PTI.

“We need to raise the level of national savings and channel those savings into investment. This means banks need to raise the interest rates offered to depositors and reduce the lending rates charged on borrowers,” Mr Subbarao said in his address to the Bancon 2010 here today.

The governor said the net interest margins of the banks, which though have came down by 0.5% in the last decade to 2.5% now, continue to be higher than their peers in other emerging markets even after accounting for their mandatory social sector spends.

Banks can maintain profitability by optimising operating costs like non-interest expenses, which include wages and salaries, transaction costs and provisioning expenses, Mr Subbarao said.

“The task for our banks clearly is to press on with efforts for sustainable reduction in operating costs through productivity improvement and skill enhancement and by leveraging of technology,” he said.

Nurturing asset quality, diligent loan restructuring of viable assets and reducing non-performing assets through recovery or upgrade can be the other streams for non-interest costs reduction, he said.

On the need to improve efficiencies, Mr Subbarao, particularly, picked out large-sized banks and said their efficiency should be comparable to global standards.

Flagging the financial inclusion agenda, Mr Subbarao said he is “troubled” that Indian banks see it as an obligation rather than as an opportunity.

“Financial inclusion will provide banks access to sizeable low-cost funds as also opportunities for lending in the small volume segment,” he said, and added that instead of looking at it as an obligation, banks should embrace it as an opportunity that can help them increase their asset base.

However, some banks pointed out that issue of net interest margins should be considered in the context of the sector profitability.

Leading private sector lender ICICI Bank chief executive and managing director Chanda Kochhar said, “The issue of net interest margins should be looked at keeping the entire profitability of the sector.”

She also pointed out that the composition of banking profits vary in each country. “Composition of NIMs (net interest margins), operating costs determine the margins of a lender.”

The second largest private sector lender HDFC Bank managing director Aditya Puri told newspersons, “In the long run, what the governor said is laudable—but there are challenges of delinquency, ticket size, costs, statutory liquidity ratio requirements et al.”

Echoing similar views, state-run Indian Bank chairman and managing director TM Bhasin told reporters, “The NIMs of the domestic banks are lower than the global average but increasing the non-interest income is both, an opportunity as well as a challenge.”

It can be noted that domestic banks in their efforts to maintain better margins and protect profits, pay very low interest rates on deposits, especially on savings deposits, which form a major share of their lendable resources, while charge very high interest rates from borrowers.

While savings deposits attract a poor 3.5%, current accounts draw zero returns to the depositor, term deposits vary between 4.5% and 8%. On the other hand, the average benchmark lending rate is above 7.5%.


Four possible bidders for Ispat

Cash-starved, mismanaged Ispat Industries has four bidders; but will ‘Ispat-friendly’ institutions step in to force a change in control?

Ispat Industries, which has been in dire straits for many years and has merely stayed afloat thanks to the combined largesse of financial institutions IDBI, ICICI, IFCI and State Bank of India (SBI), has four suitors for its cash-starved businesses: ArcelorMittal, Welspun, Sterlite/Vedanta group controlled by Anil Agarwal, and Navin Jindal, who controls the highly-successful Jindal Steel & Power. Interestingly, the Tatas, who run one of the largest steel businesses in the world, are not interested in the company.

However, while these four bidders have expressed interest in the deal, Welspun, which is the smallest of the four, wants to take the company over with the entire debt of Rs7,000 crores. The others want to pay off the institutional debt substantially.

While there can be more potential bidders for Ispat, the fact is that no deal is possible unless the financial institutions stop mothering the company and its promoters. Far from stepping in to discipline the promoters, the bankers have benignly watched Vinod and Pramod Mittal's mission to ape their estranged brother Lakshmi Mittal, who has built the largest steel group, ArcelorMittal, by stitching together favoured deals with governments around the world. In trying to emulate Lakshmi Mittal, the two brothers floated Global Steel Holdings, based in the tax haven the Isle of Man, though it is not clear how they funded their foreign adventure.

While Ispat Industries is struggling to even pay its salaries, power charges and interest, Global Steel Holdings is reported to be partnering with steel companies in various trouble-spots around the world. It apparently has steel operations in Bulgaria (and even owns the top football team there!), Nigeria, and runs a 20-year management contract to operate Zimbabwe Iron & Steel and coal blocks in Mozambique.

The Mittal brothers have also been reported to be fishing in another controversial spot, Libya. Most interestingly, The Economic Times reported in April this year that Global Steel was trying to get a stake in North Korea's Musan Iron Ore mines, estimated to hold reserves of more than seven billion tonnes. It looked strange that the Chinese, who dominate the global steel industry and have a stranglehold in North Korea, would let the discredited Mittal brothers enter into a deal with Musan.

As Moneylife wrote yesterday, over the past five years, Ispat Industries has defied every threat by its lenders to force a change of management and it has continued to raise fresh funds. Ispat's promoter-managers Pramod and Vinod Mittal have never failed to extract fresh funds, even when the company was on the verge of closure. Moneylife reported yesterday how Ispat Industires was sanctioned Rs130 crores by SBI just before its plants at Nagpur and Dolvi in Maharashtra shut down for a month. (Read:

The debt of Ispat Industries has been restructured twice already (2003 and 2009) against all prudent lending norms. Yet, neither the Reserve Bank of India (RBI) nor the government has even questioned the lenders about their continued largesse to the company and its continuing foreign adventures. If Ispat has to be salvaged and the banks' loans secured, a new owner will have to step in. What is not clear is why the institutions are postponing the inevitable.




6 years ago

ispat has most modern technology to produce steel at cheap rate only if the top management improves.


6 years ago

Good article BUT.. overseas bridges burned in late 2007 over troubles in Nigeria and the bankruptcy in Bulgaria. NO overseas lender will offer any credit. On the Q of "seed capital", the answer is self-evident. How do Indian entrepreneurs obtain the seed capital? From PSU's by over borrowing and then classifying 25% of the borrowings as equity. This is done through "over-invoicing of a project".. in this particular case a 10% surcharge on imports and 10% discount on exports would suffice, the foreign counterparty obliging. No secret to either RBI or the IT... so many engage in this practice.. Of course Tata does not want any part of this byzantine mess.. Burning Q for the bourse is whether AM will step in a-la UG.. half of the HRC output goes to UG, a shut down Dolvi creates a problem so there is a "logical business reason".. BUT will Aditya deem the collateral risk too large? Negative Fodder for the rumor mills in London/Continent? He is tough, the Number one Son.. bond to granpa not as strong as that of (number one) Son to Father.. The brothers so different, like night and day, gave rise to a "joke" originating from the myriad of expat employees in wage arrears stuck in Eastern Europe and West Africa " Same Father Different Mothers"..

Ravindra Shetye

6 years ago

While ISPAT operations of steel plant is a matter of concern (Or do we say 'should' be a matter of concern) it is naot necessary to paint all their operations abroad ( which incidentally are under a different, possibly non Indian company) need to be painted with black paint.
There are many companies which are profitable outside India but are not profitable India for the same operations.
As far as the steel plants in India are concerned the Government policy of not giving the Iron mine linkages to the Consumers i.e. Steel Plants but allowing the miners to just dig out this vital resource and export at fat profits needs to be investigated with the same vigour as the 2G scam. Surprisingly the two issues are very very similar. The Govt may come out with even more serious concerns with the Ministry of Mining.

Shadi Katyal

6 years ago

One wonders how such a group can stay afloat and banks keep giving such large loans. Is there no accountability?
Why would Tata or any other firm buy when they know the debt ratio plus the cost of production of steel in this group.
If the management has been so inadequate how come the unit has survived?
The bill has to be foot by Govt Banks and who knows how much went for various officers?


Ravindra Shetye

In Reply to Shadi Katyal 6 years ago

The answer is there already in the recent Bank Loan scam if the Govt wants to look into it.


6 years ago


NTPC Vidyut Vyapar Nigam appoints Anil Agarwal as CEO

State-run NTPC said its wholly-owned subsidiary NTPC Vidyut Vyapar Nigam Ltd has appointed Anil Agarwal as its chief executive officer (CEO).

Mr Agarwal joined NTPC as executive trainee in 1977. He brings with him vast experience in the area of contracts. He has been associated with contracts related to power plants and also procurement of gas and coal for NTPC.

NVVN is the nodal agency for implementing the first phase of the Jawaharlal Nehru National Solar Mission of the government under the National Action Plan for climate change to achieve the objectives of long-term energy security and ecologically sustainable growth.


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