The Effects of Monetary Policy on Selected Private and Public Sector Banks - An Empirical Study

The evidence of studies conducted on effects of Monetary policy on banks and their behavior clearly states that the frequent changes in the instruments of Monetary policy has a direct and indirect influence on the operations of banks and this in turn affects the operations of small and medium scale industries. Industries try to reduce their borrowings and postpone their investments during tight money. At the same time banks take a conservative approach while lending. Banks try to be selective due to funds shortage and put restrictions on overdraft facilities. This paper examines what effect banks have and how they behave during policy on rates changes. The study conducted reveals that, the monetary policy tools play an important role in deciding the lending and borrowing rates of the banks. A hike in key policy rates leads to increase in banks lending rates which results in low demand from the borrowers and increased bad debts which in turn creates Non Performing Assets (NPA) for banks. Banks did not find significant number of individuals approaching other money lenders during credit squeeze. Customers did not approached money lenders as they relied on the trade credit rather than relying on banks credit.