Banks need to increase their deposit rates and bring down their lending rates, Reserve Bank of India Governor Duvvuri Subbarao said in Mumbai on Friday.
"Banks need to raise the interest rates offered to depositors and reduce the lending rates charged on borrowers - in other words, reduce their intermediation costs, or in technical terminology, reduce the net interest margin (NIM)," Subbarao told a banking conclave.
The governor said Indian banks have done well in bringing more people into the banking network, providing them avenues to secure their financial future but much more needs to be done.
"The net interest margin of the Indian banking system is higher than that in some of the other emerging market economies even after accounting for mandated social sector obligations such as priority sector lending and credit support for the government’s anti-poverty initiatives," said Subbarao.
"To achieve our collective aspiration of double-digit and inclusive growth, we need to raise the level of national savings and channel those savings into investment," he added.
A former finance secretary, Subbarao also said the financial sector had contributed immensely to the acceleration seen in the country's economic growth indicated by the rise in bank credit as a proportion to the gross domestic product rose from 29% for the year ending March 2000 to 55% by the year ending March 2010.