"For double-digit growth that we aspire, we need to save so that we can invest more. For that to happen, we need to encourage savings, which means that banks will have to raise interest that they offer to depositors and they have to reduce interest they charge from borrowers.
"In technical terms, what you understand is that the net interest margin has to come down," he said on the sidelines of an event organised by Institute of International Finance in New Delhi. Currently, banks pay up to 9.5 per cent interest on fixed deposits.
Indian banks, Subbarao stressed, need to improve efficiency to catch up with their counterparts in the other nations.
"They (Indian banks) have to reduce non-interest expenses including wages and salaries, reduce transaction costs, provision cost... bring in productivity enhancement, reduce NPAs and leverage on technology", he added.
On meeting Basel III capital requirements of Indian banks, Subbarao said: "At the aggregate level, Indian banking system meet Basel III capital standards. In fact, they are comfortably above Basel III requirement at the aggregate level."
However, he added: "It is quite possible that few individual banks may have to augment capital (to meet Basel III norms)."
As per the Basel III rules, proposed by the Basel Committee on Banking Supervision, banks would have to raise the level of top-quality capital known as core Tier 1 to 7 per cent of their risk-bearing assets by 2019. Currently, core Tier 1 requirement is 2 per cent.