BASE RATE GIVES MARGINAL TREMORS FOR BANKS

Lending rates should be sensitive to policy rates. This is what Reserve Bank Of India wants. In other words when RBI cuts policy rate so should the banks. But is this really possible. Is lending the sole function of banks. Advances or loans form the asset base of the banks whereas deposits in the form of current, time and savings constitutes the liabilities. So when the interest paid by the banks, the cost of deposits is not going down, how can income of the banks be reduced.

In addition to all of this non performing assets of the banks are still not under control and profitability is marred by rising provisions. In the backdrop is it possible for banks to reduce their base rates by following marginal cost of funds. And what happens when policy rates go up. Will we still be able to follow marginal cost of funds?