ATM :: Banks, not clients, gain from RBI rate cuts

Partha Sinha, TNN | Oct 7, 2015, 03.25AM IST | Times of India
A study by India Ratings, a subsidiary of global rating major Fitch, says the banks passed on less than half the volume of RBI’s rate cuts to their borrowers.


MUMBAI: At a time when both the Centre and the industry have been clamouring for lower interest rates, banks have not fully passed on rate cuts amounting to 125 basis points (bps) made by the RBI over the last one year to their borrowers. Instead, they have strengthened their own revenues. What’s more, lakhs of depositors have been singed as banks have cut deposit rates more than the RBI’s cut in rates, thus giving them lower returns on their savings.

A study by India Ratings, a subsidiary of global rating major Fitch, says the banks passed on less than half the volume of RBI’s rate cuts to their borrowers. Though it’s a problem of transmission of repo rate cuts at the banks’ end, RBI has been facing flak from both the government and the industry for not cutting rates enough to help spur growth in the economy, which for the last few months has been showing signs of a slowdown.

The study shows three interesting facts. First, compared to RBI’s 125 basis points cut in rates in 2015, the banks have cut fixed deposit rates — the money they pay to their customers as interest on fixed deposits, etc — by 130 basis points. This has resulted in customers getting less from their savings in banks. Second, at the same time, these same banks have cut lending rates — the rate of interest paid by their borrowers — by just 50 basis points. And third, transmission of RBI’s decision — that is, how the central bank’s rate cut percolates down to the banking sector — has been more efficient in the market for short-term papers where the rates have dropped more than 150 basis points in 2015.

“Interest rate cuts and hikes have been utilized by banks to absorb the upside and pass on the downside to customers,” India Ratings and Research noted. In its recent policy meet, RBI governor Raghuram Rajan said, “Markets have transmitted the Reserve Bank’s past policy actions via commercial paper and corporate bonds, but banks have done so only to a limited extent.” Rajan, who was under pressure for a long time from corporates, industry trade bodies and politicians to cut rates further, in a speech on September 18 had also said that RBI’s tasks included ensuring rates of interest that would satisfy “not just the vocal borrowers but also the silent savers”.

In its report, the rating agency said that transmission in rates “is being held back by banks and they have been repricing with a lag only the unfavourable movements in rates”, and the “policy cycle is being used by banks to their advantage”.

For example, soon after RBI’s 50 basis points rate cut last week, the banking sector leader SBI reduced its lending rates by 40 basis points, thus transmitting only 80% of RBI’s decision. Worse, its new home loan customers will benefit only by 20 basis points, that is just 40% of the RBI’s cut. Among the private sector banks, ICICI Bank and HDFC Bank both cut their lending rates by 35 basis points, that is only 70% transmission.

Not only the RBI governor but top leaders from India Inc too have started raising their voice for banks to do more. On Tuesday, L&T chairman A M Naik criticized domestic banks for denying relief to corporates by not cutting lending rates in line with the reduction in benchmark rates RBI.

According to bankers, one of the reasons for lack of transmission is that with corporate loans takeoff at a low ebb, and bad loans rising, they have to make some profits from some segments and that segment happens to be retail banking. The other reason is that the blended cost of funds—the cost at which banks raise money—for every bank is different. Depending on the cost of funds, every bank decides its lending rates with larger banks able to pass on about 70% of their benefits from rate cuts. “If the corporate loan growth picks up, better rate transmission will be possible,” a banker said.

The study by India Ratings show that in the last 10 years, in most cases when RBI has cut policy rates, banks have cut deposit rates at a faster pace and the quantum has also been higher compared to lending rates. “The same was also true when policy rates were hiked, where lending rates went up and the quantum was also higher compared to deposit rates,” the report said.

The report also pointed out that some of the banks cut base rates, but at the same time they increased their spreads, denying part of the rate cut benefits to their consumers. “Some banks have cut lending rates, to a larger extent for new customers and not as much for their existing customers, while charging existing customers if they wish to switch to the lower rates,” the report said.

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