Interest Rate and Monetary Policy

Interest Rate and Monetary Policy



There is a paramount need to reduce the interest rates of bank loans and reduce the cost of funds in the economy to boost investment and production, but the fact remains that banks are not in position to effect any reduction in interest rates due to some compelling reasons.

Their Net Interest Margin hovers around 3% which they do not want to touch what ever may be the compulsions.


Historically, banks get subsidized by depositors and the government and the borrowers get subsidized by all stake holders.


The Prime lending rates and Bench Mark Prime Lending rates do not seem to have been arrived at on scientific basis and their alignment with Whole Sale Price Index and Consumer Price Index is a far cry.


There is a close correlation between high interest rates and Non Performing Advances. The good borrowers have to necessarily take care of the losses arising from out of bad loans. Monetary policy has its own limitations to reflect on the lending rates of banks due to various reasons, the prominent among them being prevalence of administered interest rates in respect of certain segments and the inability of depositors to find alternative avenues of investment.

(This write-up appeared in Business Line on 3rd July 2009)


Dr.T.V.Gopalakrishnan