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This is an archive article published on September 7, 2020
Rate cuts on existing loans much lower than fresh credit, PSBs outdo private banks
Data from the RBI shows that in the 15-month period, the weighted average lending rates on outstanding rupee loans has come down by only 53 bps or almost one-fifth of the cut in repo rate — the rate at which the RBI lends to commercial banks.
The Centre has told the Supreme Court that it has decided to waive compound interest on MSME and personal loans up to Rs 2 crore for the six-month period. (Representational Image)
Even as the Reserve Bank of India (RBI) has cut the repo rate by 250 basis points (bps) from 6.5 per cent to 4 per cent, in the 17-month period between February 2019 and June 2020, there is very little that existing borrowers have gained from the same.
Data from the RBI shows that in the 15-month period, the weighted average lending rates on outstanding rupee loans has come down by only 53 bps or almost one-fifth of the cut in repo rate — the rate at which the RBI lends to commercial banks.
This means that even as the economy has seen a sharp reduction in interest rates, all existing borrowers continue to pay a higher interest rates on their borrowings.
According to the RBI data, while the transmission in lending rates on outstanding loans has been very slow, banks have been more transparent in the transmission of rate cut in deposit rates and the median term deposit rate has come down by 147 bps in the same period.
Explained
Borrowers still pay higher rates
The uneven transmission of cut in repo rate by the RBI to loans disbursed by banks indicates that even as the economy has seen a sharp reduction in interest rates, all existing borrowers continue to pay a higher interest rates on their borrowings.
Banks have, however, been more diligent in transmission of repo rate cut in fresh rupee loan rate as the WALR for fresh rupee loans has come down by 162 bp. It is however still far from the the 250-bp cut in the repo rate executed by the RBI.
In its August Monetary Policy Statement, the central bank said, “The transmission to bank lending rates has improved further, with the weighted average lending rate (WALR) on fresh rupee loans declining by 91 bps during March-June 2020.”
Private banks vs PSBs
A closer look at the data shows that in the same 15-month period, private sector banks have been much slower than the public sector banks (PSBs) in transmission of repo cut in case of outstanding rupee loans. While PSB’s brought their WALR for outstanding loans down by 58 bps, private banks brought it down by only 40 bps.
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In case of fresh rupee loans, however, the private banks have been more aggressive as they cut the rates by 195 bps against a reduction of 129 bps by PSBs.
A similar trend was observed when interest rates were rising during June 2018-January 2019, as private banks’ lending rates on fresh loans rose faster than that of state-owned banks. Even in case of term deposit rates, private sector banks have been more aggressive as they have brought down the weighted average domestic term deposit rate by 109 bps against a cut of 75 bps by PSBs.
Interestingly, foreign banks have been the most transparent in transmission of repo rate cut. While they have bought their WALR for outstanding rupee loans down by 139 bps, the WALR for fresh rupee loans for foreign banks is down by 243 bps against a 250-bp cut in repo rates.
In contrast to PSBs, WALR on fresh rupee loans of private sector banks is typically higher, reflecting their higher cost of funds and higher marginal cost of funds-based lending rate (MCLR).
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Interest rate reduction for fresh rupee loans sanctioned has been better in sectors including housing, other personal loans and MSME loans, where new floating rate loans have been linked to external benchmarks such as MCLR.
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