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Journalism of Courage
Even as the RBI cut repo rate by 135 bps from 6.5 per cent to 5.15 per cent in calendar year 2019, data released by the central bank shows that the weighted average loan rate (WALR) on outstanding loans for private sector banks has seen no decline between January 2019 and January 2020.
By comparison, the same for state-owned banks declined by 21 bps from 9.8 per cent to 9.59 per cent.
However, when it comes to cut in deposit rates, private banks seem to have taken the lead. Data from the Reserve Bank of India (RBI) shows that in the 12-month period, while public sector banks (PSBs) cut the weighted average domestic term deposit rates on monthly term deposit by 29 basis points (bps), that for private banks came down by 51 bps.
As for the lending rates, when it comes to fresh loans, private banks have been largely in sync with the state-owned counterparts, albeit a little slower, in the quantum of transmission of rate cuts. While the WALR on fresh loans for private banks came down by 50 bps in the 12-month period, that for PSBs came down by 62 bps.
Banking industry executives said transmission is relatively faster on fresh loans, but that on outstanding portfolio takes times to adjust to new regime.
“When we grant loans, our interest cost is tied up immediately. For example, for home loan given 5 years ago, the bank treasury would have locked in rates prevalent at that time even for the bank,” an executive with a private bank said.
Banks typically charge conversion fee from customers to move them to a lower rate to partially account for the rate differential. However, not many customers are aware of this facility, leading to rigidity in downward movement in loan rates. It is, however, interesting to see that WALR on outstanding loans for private banks did not see even a single basis point decline between January 2019 and January 2020.
In order to improve rate transmission, the RBI’s Monetary Policy Committee, on February 7, announced several measures to boost credit flow and liquidity in the markets. To put downward pressure on rates, RBI announced a cash reserve ratio (CRR) exemption on incremental retail loans in the automobile, housing and MSME sectors till July 31, 2020.
On several occasions, RBI has pointed out the delay in transmission of cut in lending rates by scheduled commercial banks. While there has been some transmission in case of fresh loans by private banks, the fact that there has been no decline in WALR on outstanding loans by private lenders is something that RBI needs to look into. At the same time, private banks seem far more aggressive than PSBs when it comes to cutting deposit rates.
It also decided to introduce long-term repo operations which enabled banks to raise funds at lower rates from the central bank. At present, banks are supposed to keep 4 per cent of deposits with the RBI as CRR which doesn’t carry any interest.
The CRR exemption in certain incremental loans followed a deceleration in credit growth to the retail sector.
The transmission of rate cuts has been “steadily improving” and is expected to improve further in the coming months, RBI Governor Shaktikanta Das had said on February 16 after the central board meeting, where Finance Minister Nirmala Sitharaman addressed the board after the Budget.
“With regard to the impact of rate cut plateauing out, I would not entirely agree with that because transmission of rate cut has been steadily improving. If you recall, in December MPC when we met, the transmission to fresh rupee loans was in the order of about 49 basis points. In this monetary policy, we have said that it has improved to 69 basis points. It is the consequence of the rate cut, surplus liquidity that we ensure in the system and third, and very important, the external benchmarking which was brought into operation from October 1 onwards. Transmission is slowly and steadily improving and it should improve even more in the coming months,” Das said.
