Bankers reluctant to pass on entire policy rate cut to borrowers: Study

Bank deposit rates are lower than small saving schemes

Interest rate cuts and hikes have been utilised by banks to absorb the upside and pass on the downside to customers, according to a study by India Ratings and Research (Ind-Ra). The 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 with lending rates.

The same was also true when policy rates were hiked, where lending rates went up, and the quantum was also higher compared with deposit rates.

In the recent policy cycle, RBI has cut policy rates since January 2015 by a cumulative 125bps, banks have cut one year deposit rates by an average 130bps and lending by 50bps, which includes the base rate cuts in the last one week.

Base rate is the rate below which a bank cannot lend. In the last 18 months, three-month commercial paper and certificate of deposit rates have fallen by 150bps. Thus transmission of policy rates has been more through market rates and banks deposit rates in the last one year, according to Ind-Ra.

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.

This has been one of the major impediments for the lending rates being higher, believe bankers.

However, transmission on the deposit side has been fully passed through and in most cases banks deposit rates are lower than rates offered by most small saving deposit schemes like public provident fund (PPF) and national savings certificate (NSC) etc., according to Ind-Ra.

Monetary transmission
Ind-Ra strongly believes that 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.

While the central bank is likely to be accommodative, this stance is unlikely to benefit the end consumers unless there is better transmission.

Ind-Ra expects the pace of transmission by way of lower lending rates to accelerate in the coming months, given the RBI’s focus and the lagged impact of lower rates since January 2015.