According to Sri Duvvuri Subba Rao, Governor, Reserve Bank of India, banks need to increase their deposit rates and reduce lending rates to accelerate the savings, investment rate and boost a double-digit growth.
"This means banks need to raise the interest rates offered to depositors and reduce the lending rates charged on borrowers - in other words, reduce their intermediation costs, or in technical terminology, reduce the net interest margin (NIM)," Duvvuri Subbarao said in a speech on Friday.
There is a need to raise the level of national savings and channel those into investments to achieve double-digit inclusive growth, he added.
Subbarao said that Indian banks' NIM was still higher than their peers in other emerging market economies even after accounting for mandated social sector obligation.
Indian bank loans rose 22 per cent on year as of Nov. 5.
The growth is in line with the central bank's projection of 20 percent by March end but deposit growth at 15.3 percent as of early November lags the central bank's projection of 18 percent.
"Once financial inclusion happens, NIM will come down but for the next 1-2 years the transaction cost will remain high and so margins of banks are likely to stay at high levels," said D.L. Rawal, chairman and managing director of Dena Bank.
Subbarao urged banks to improve their efficiency ratio by optimizing non-interest expenses, which will in turn enable banks to protect their net interest margin.
At the aggregate level, the net interest margin of the Indian banking system has narrowed from 3 per cent in 1999/2000 to 2.5 per cent in 2009/10," Subbarao said in his speech.
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