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With the CRR on a declining trajectory, the key pre-requisites for a durable reduction in bank lending rates are better management of NPAs and reduction in any unreasonable wedge between costs and returns, the apex bank has said.

Mumbai , Aug. 27

THE Reserve Bank of India has said there is room for aggressive reductions in the `average' lending rates of banks so that the `real' lending rate remains in alignment with the trend in GDP growth rate.

In its annual report for the year 2002-03, the apex bank has said that the present economic scenario is favourable for lowering lending rates, with lower fund costs, reductions in CRR, lower NPAs and improvements in risk perceptions.

According to RBI, a preliminary analysis to assess the level of real lending rate was conducted on March 2002.

For the purpose of this exercise, inflation expectation was taken to be the projected inflation in the Monetary and Credit Policy statement for April 2002-03 at 4 per cent. Accordingly the `real' lending rate works out to 10 per cent and `average' lending rate of 14 per cent.

RBI has said that the derived real lending rate needs to be adjusted for the wedges in the form of CRR pre-emption as well as carrying costs of NPAs, estimated at about one per cent each.

Implicit in the real lending rate is a risk premium, which can be proxied by the spread of the discount rate on commercial paper over the yields of 91-day treasury bills estimated at around two per cent.

With the CRR on a declining trajectory, the key pre-requisites for a durable reduction in the bank lending rates are better management of NPAs and reduction in any unreasonable wedge between costs and returns, the apex bank has said.

In India, the generalised decline in inflation since the second half of the 1990s has been reflected in a downward trend in nominal interest rates.

The fall in nominal interest rates of banks has been lower than the decline in the rate of inflation so that the real interest rates may not have fallen in tandem with nominal rates, according to RBI's annual report 2002-03.

Thus, despite the fall in deposit rates, depositors have received positive real interest rates of close to 2 per cent in the second half of the 1990s, which is much higher than the real return on deposits during the first half of the 1990s.

An analysis of the costs of bank lending shows that the structural rigidities of the system impose several costs on banks over and above the cost of funds and inflation, according to the apex bank.

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