Banking regulator, Reserve Bank of India has directed banks that they should cut the cost of low value transactions considerably to make space for increased penetration.

The apex bank came up with this decision when it has been found that many banks could not make efficient use of technology in increasing penetration level of banking facilites across the country thereby affecting productivity.

Speaking at the Economic Times Banking Technology Conclave last week, RBI deputy governor KC Chakrabarty said: "Technology enables increased penetration of the banking system, increases cost effectiveness and makes small value transactions viable."

"The net interest margin of banks has not reduced much; especially when the structure of business has not changed. There is enough empirical evidence to show that the cost of small transactions has not gone down. Unless low-value transactions are not cost-effectively done, it is not going to impact efficiency drastically. The deposit and advances per account has shown a rising trend which signifies that the rise in business is not due to acquisition of customers on the lower end of the pyramid. The intermediation costs of banks in India still tend to be higher than those in developed banking markets," he added.

"The constraints hampering the re-engineering of business processes and MIS; implementing technology upgradation programme without abandoning legacy systems are well appreciated. The net result will be a tinkering with parts rather than the needed systemic overhaul that could have been achieved had the banks adopted a planned transformational management system," he said. He said that while only 10% of the bank staff was involved in back office jobs, 90% was doing front office tasks like client acquisition, relationship management etc.