Scope for banks to reduce lending rates: RBI Governor

Mumbai, Jan 27 (PTI) Reserve Bank Governor V Subbarao, reviewing the monetary policy today, chose to keep the key rates unchanged, but maintained that there is further scope for the banks to reduce lending rates. He said some banks had told him about the constraints being faced by them, like high cost of deposits and the fact that they cannot reduce deposit rates, small savings instruments offering higher interest rate, asset quality in times of downturn etc. "We recognise the constraints but believe banks have room to reduce their lending rates," he observed. The Governor, in his meeting with bank chairmen today, observed the central bank would ensure ample liquidity in the system, keep call money rates within the LAF (Liquidity Adjustment Facility) corridor and will do interest rate adjustment as and when the situation demanded. Referring to consistently falling inflation, the Governor apprehended that there could be "few episodes of negative inflation". He felt it would be statistical in nature and not structural as feared in developed countries. He also felt that negative inflation (inflation going down below zero per cent) would not be a prolonged one. Subbarao further said that due to downturn, there was a possibility of non-performing assets of banks to go up. "Historical evidence suggests NPAs go up during downturn," he said. "It may be a problem going forward, but it won't affect soundness of banking," he added. PTI

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