Banks passed on nearly half of RBI rate cuts: Report

Public and private banks have passed on nearly 50 percent of the rate cuts brought in by the Reserve Bank of India (RBI) since March 2020.

The Central bank undertook multiple, consecutive rate cuts totalling 115 basis points (bps) to make borrowing cheaper and stimulate the economy amid the coronavirus pandemic and lockdowns. (1 bps is 0.01 percent)

Banks, however, have failed to significantly pass on the benefit to customers, The Economic Times reported.

Average lending rates for fresh and outstanding loans across banks fell 50 bps and 40 bps, respectively, from April to November 2020, it said.

Moneycontrol could not independently verify the report.

Structure of deposit rates in Indian banks - which depend heavily on retail deposits instead of market-based or wholesale options - has contributed to this, economists told the paper.

Rahul Bajoria, the chief economist at Barclays India, said the slow transmission was not surprising since banks' significant costs were not directly linked to benchmark policy rates, and "past experience showed that it took about 12 to 18 months for full transmission of policy rates depending on the liquidity conditions."

He added that the RBI may undertake more rate cuts over the next six months to manage liquidity.

In fact, term deposits account for over 40 percent of banks' source of funding and their costs are "effectively locked."

Banks also face “asymmetry in interest rate settings between deposit and loans – where 80 percent of lending is done on floating rates, research by Barclays Capital showed.

Notably, while public banks on average have cut lending rates on outstanding loans by 59 bps and fresh loans by 68 bps between April and November 2020, private banks have only cut an average of 48 bps and 36 bps, respectively.

Anil Gupta, Sector Head – Financial Sector Ratings at ICRA Ratings, credited the public banks’ “stronger growth in deposits which gives them an edge in pricing loans” and “surplus liquidity which gives them better leeway to reduce lending rates.”