Banks using RBI rate cuts to their advantage: Ind-Ra

The RBI has cut rates by 125 bps since January 2015, but banks have cut one year deposit rates by an average 130 bps. Since 2010, when the base rate was introduced, banks have passed on nearly the entire increase in repo rate to customers, but they have been reluctant to reduce base rates when the RBI has reduced repo rates. Clearly there is no need for a hosanna whenever the RBI cuts rates as is done in the media normally.

But, a consumer who approaches his bank lured by the new base rate being publicised would surely be in for a rude shock – he will find that banks are offering him higher rate and not the base rate. Banks, however, reduced the rates only to the tune of 0.25%, barring HDFC Bank, which had slashed its rates by 0.30%.

India Ratings said this stance is unlikely to benefit the end consumers unless there is better transmission. Banks are using the policy cycle to their advantage, says the rating agency.

India Ratings highlights that the market has been more successful in transmitting lower rates than banks citing 150 bps fall in deposit rates of commercial paper and certificate of deposits. Thus transmission of policy rates has been more through market rates and banks deposit rates in the last one-year.

Soon after the policy rate cut, RBI Governor Raghuram Rajan, as also Finance Minister Arun Jaitley, had yesterday expressed hope that banks will transmit the benefit to borrowers to boost investments and the economy.

Sinha said that banks are holding the transmission in rates back and they have been re-pricing with a lag only the unfavourable movements in rates.

The customer, the person the Governor supposed to help, continues to suffer as banks have cut lending rates to a larger extent for new customers.

Mumbai: Ever wondered why the equated monthly instalment (EMI) on your home loan has marginally fallen even though the Reserve Bank of India (RBI) has lowered its Repo rate by 125 basis points since January this year? As it is, banks have begun charging for usage of ATMs without expending any funds on upkeep and maintenance of these machines, which are often out of order or kept in unhygienic surroundings. RBI’s latest move comes as a positive surprise as a majority of the banks were only expecting a cut of 25 basis points.

Last year, global rating agency Standard & Poor’s (S&P) has cut long-term issuer rating for IOB from “BBB-” to “BB+” on sharp deterioration in the asset quality. A study of the last 10 years shows, that in most cases when policy rates have reduced, deposit rates have come down faster and the quantum has also been higher compared to lending rates.

The Indi-Ra study, however, points out that despite this fear of capital flight, banks have been passing on the full reduction on interest rates on deposits while keeping the lending rates much higher.