RBI Governor Raghuram Rajan, top bankers exchange barbs over interest rates

MUMBAI: In a virtual war of words, RBI Governor Raghuram Rajan today said it is "nonsense" to assume cost of funds has not fallen for lenders, drawing sharp retort from top bankers with SBI chief Arundhati Bhattacharya saying "in India things work differently from international banks".

Within hours, the state-run lender however announced a small cut of 0.15 percentage point in its base lending rate- the first by a major bank in many months.

Severely critical of banks not passing interest rate cut to borrowers, Rajan said the liquidity position was strong and there was no reason for banks not to cut lending rates.

"I do not see an environment where credit growth is tepid, banks are sitting on money and their marginal cost of funding (has) fallen, the notion that it hasn't fallen is nonsense, it has fallen," Rajan said.

Rajan, who has announced two rate cuts so far this year without any major bank passing on the same to borrowers, said that sooner the banks cut rate the better it would be for the economy and hoped market dynamics will force lenders to lower rates.

Top bankers were, however, unanimous in rejecting Rajan's suggestions that the situation was ripe for a rate cut and said it takes a lot more than repo rate reductions by the central bank for banks to cut their base rates.

In a sharp reaction Bhattacharya said: "In India things work differently from the international banks. We are very deposit based. If you look at SBI, we have just 1 per cent market borrowing and the rest is basically long term bonds or deposits and deposits are the lion share of it. So, it is based on long term deposits."

Rajan, who earlier served as chief economist at IMF and has been Professor of finance at Chicago University, said: "We are not looking for a specific number (on the bank rate cuts) and saying unless this happens, nothing more will happen. But we want to facilitate the process of transmission."

Bhattacharya said in the absence of social security net in India, the banking system has been working as a proxy for the social security net with people putting their savings in banks and planning their future based on banks' interest rates.