expected to enhance the allocative efficiency of the financial intermediation process, permit an assessment of the relative efficiency and cost structure of banks and improve monetary transmission from the reserve bank ’ s policy rate to the bank ’ s lending rates. 30. it is satisfying to note that banks have made a smooth adjustment to the base rate system. also, base rates of major banks have converged. the base rate system has improved transparency and transmission of policy rate changes to banks ’ lending rates. for instance, between september 2010 and december 2011, the reserve bank raised the policy bis central bankers ’ speeches rate by 250 basis points. during the same period, the average base rate and weighted average lending rate of scheduled commercial banks increased by a similar magnitude. after the reserve bank reduced policy rate by 50 basis points in may 2012, 26 banks responded with a reduction in their base rates evidencing more efficient monetary policy transmission in both upward and downward directions. 31. one problem that has persisted even after the introduction of the base rate system relates to the lack of transparency in the customer specific spread charged to a borrower over the base rate. there have been complaints that the spread charged to a customer has been revised upwards without any apparent change in her risk profile. also, where floating rate loans are concerned, existing customers have been disadvantaged vis - a - vis new customers with similar credit ratings, resulting in complaints about discrimination. in order to address this malady, the reserve bank constituted a working group under the chairmanship of deputy governor anand sinha to determine the principles that must govern proper, transparent and non - discriminatory pricing of credit. the working group is expected to submit its report by august 2012. savings deposit interest rate 32. the next on my list of issues is savings deposit interest rate. up until 1990, india ran a repressed financial system with a complex plethora of administered interest rates on both deposit and lending sides. an important element of the early 1990s financial sector reforms was to deregulate the interest rate structure to spur competitive impulses, improve allocative efficiency and strengthen monetary transmission. the savings deposit rate, however, continued to be regulated ; it remained unchanged at 3. 5 per cent since march 1, 2003 ( revised to 4 per cent in may 2011 ) even as other deposit rates moved in either direction in response to the reserve bank ’ s policy rate calibration. 33. the advisability of deregulating this last vestige of administered interest rate

the fifth and last issue is liberalization of the branch authorization policy. the thrust of the reserve bank ’ s branch expansion policy since 1962, when banks were first mandated to open branches in unbanked / banked centres in the ratio of 2 : 1, has been to ensure banking penetration into the underbanked areas of the country. the precise formula has been continuously tweaked to reflect the changing scenario, but the underlying objective has all along been to link branch licences in urban / metropolitan areas to branches set up in disadvantaged semi urban / rural areas. 39. till 2005, the practice was for rbi to issue licences for individual branches. in september 2005 the policy was liberalised, importantly shifting from branch licensing to branch authorisation. the new policy replaced the practice of licences for individual branches from time to time by an aggregate annual approval through a consultative and interactive process. banks ’ branch expansion strategies and plans over the medium - term would be discussed by the rbi with individual banks. the medium term framework and the specific proposals would cover opening, closing, shifting, merger and conversion of all categories of branches. 40. by 2009, there was a growing consensus that further liberalization would be in order especially so as to enhance banking penetration and promote financial inclusion. accordingly, in may 2009, a working group under the chairmanship of executive director vijaya bhaskar was constituted to review the branch authorisation policy with a view to providing greater flexibility to banks in opening branches. 41. based on the recommendation of the working group, in december 2009, the case by case approval process was given up and domestic banks were given general permission to open branches in tier 6 to tier 3 centres ( population up to 49, 999 ) and in rural, semi urban and urban centres in the north eastern states and sikkim. in november 2011, this general permission was further liberalized to opening of branches in tier 2 centres ( population up to 99, 999 ). thus presently, only opening of branches in tier 1 centres, largely urban and metropolitan centres with population of 100, 000 and above, requires prior rbi approval. in respect of the north - east states and sikkim, laissez faire operates even for tier 1 centres. 42. in 2010, a roadmap was drawn up to provide access to formal banking to every village with a population over 2, 000. under the roadmap, about 74, 000 villages with population above 2, 000 were identified as