Banks siphon off rate cut benefit

Mumbai: Interest rate cuts and hikes have been utilised by banks to absorb the upside and pass on the downside to customers. Rating agency, India Ratings believes that the banks are holding back the transmission in rates and they have been repricing with a lag only the unfavourable movements in rates.

“In the recent policy cycle, RBI has cut policy rates since January 2015 by a cumulative 125 basis points, banks have cut one year deposit rates by an average 130 basis points and lending by 50 basis points, which includes the base rate cuts in the last one week. In the last 18 months three-month commercial paper and certificate of deposit rates have fallen by 150 basis points. Thus, transmission of policy rates has been more through market rates and banks deposit rates in the last one year,” the rating agency noted.

India Ratings believes that banks are using the policy cycle to their advantage. A study of the last 10 years shows that in most cases when policy rates have reduced, deposit rates have comedown faster 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.

Bankers have been reluctant to transmit the entire policy rate cut to borrowers and have sought a reduction in the interest rates on small savings schemes on fears of flight of cash from bank deposits to such schemes. Ind-Ra strongly believes there is a clear aberration in monetary transmission, which needs to be corrected so that the lower interest rates get passed on to borrowers. This is particularly imperative in the current scenario, to support demand recovery through capex and discretionary spending.