Should RBI provide incentives to banks to cut interest rates for consumers, is the debate that is raging among analysts right now.
Big banks, including India's largest state-run lender SBI and private sector lender ICICI Bank, have not slashed interest rates despite the Reserve Bank of India or RBI cutting repo rate - the rate at which the central bank lends short term money to banks - twice this year. As a result, lending rates continue to remain in double digits, hampering credit offtake and growth, analysts say.
Even as the Reserve Bank of India or RBI Governor Raghuram Rajan on Tuesday came down heavily on lenders for not passing the benefits of lower interest rates to consumers, while he kept policy rates unchanged in the central bank's first bi-monthly policy for 2015-16, analysts debated if banks need that extra push to start cutting rates.
"Suppose the RBI comes up with a second repo window, saying that all banks which actually lower their interest rates, the moment they lower their repo rate will have further finance through the LAF route. It's kind of like providing an incentive," Madan Sabnavis, chief economist, CARE Ratings told NDTV. LAF is a window used to allow banks to borrow money from RBI to help them in adjusting the day to day mismatches in liquidity.
"Bank chooses not to make use of it, they can stick to their old interest rates and by lowering the rates they could probably be incentivised," Mr Sabnavis added.
Other experts however, seem to have a different take on the matter, with former SBI chairman Pratip Chaudhuri saying such a move would be against global norms and practices.
"I would like to know is this done in any developed country by any regulator because RBI all the time says they are under an obligation and their driven objective of converging with global standards. So it would be interesting to know if such global standards exist...at least I am not aware of," Mr Chaudhury, said countering Mr Sabnavis' point.
Former ICICI Bank top executive and current managing director, Capital First V Vaidyanathan told NDTV that competitive pressure from the market itself will lead to banks to lower rates and it would be wrong to dangle "carrots" in front of them.
"I think it would be pretty much on the wrong track to put some sticks and carrots around this whole thing, when we have decided to stay deregulated, I think it should stay deregulated. At best, a signalling from the RBI which they are doing right now, pretty much a stern signal is good enough.
"I think the important thing is competitive pressure will make it (the rate cut) happen. I can tell you a large number of corporates and NBFCs (non-banking finance companies) are not borrowing from the banking system including us, Capital First, because the markets are available, NCDs (non-convertible debentures), CP (commercial papers) and so on, it's much cheaper than the banking system," Mr Vaidyanathan said. (Watch)
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