On the back of easing inflation numbers and slowing growth rate, the Reserve Bank of India (RBI) pared repo rate by 25 basis points (one fourth of a percentage) in the first week of this month. But, the commercial banks do not seem to be in a mood to pass on the rate cut benefit to customers and borrowers even though it is 15 days since the repo rate was cut.
Apart from some token exercises by a few lenders, nothing substantial has happened. It seems banks are using the RBI policy cycle to their advantage leading to complete aberration in the monetary transmission. Since January 2015, the central bank has cut repo rate by 1.75 per cent. However, banks have passed not even a quarter of this consolidated cut to consumers. They have retained 1.25 per cent of the extra money with them.
If they continue to behave this way, no matter how many times and how much the RBI cuts the policy rates, it will have zero effect on the common man. The stubbornness of commercial banks to not pass on the benefits to customers is a no brainer. There is a clear pattern in their behaviour over the last many years.
They have been consistently refusing to play ball with the RBI when it came to passing on the rate cut benefits despite loads of advice from the central bank to this effect. Understandably, the banks, especially in the public sector, are struggling with bad loans, but their failure to respond to the rate cut is hurting the customer with good credentials and intentions.
To counter banks’ reluctance to ease the lending rates, the RBI introduced the marginal cost of lending rate (MCLR) methodology in April to set interest rates. The MCLR takes into account the cost of funds by banks both from deposits as well as market borrowings. Nevertheless, there has not been a significant easing in bank lending rates since April.
The disappointment of the Reserve Bank with the banks’ attitude was conspicuous in the reaction of Governor Urjit Patel. “I agree that the transmission to bank borrowers has been less than what anyone of us would have liked it to be.” So far this fiscal, under the new MCLR regime, public sector banks have reduced their base rates by 15 basis points on average while private sector banks have reduced their rates by 25 basis points.
These same banks lost lakhs of crores of rupees as non-performing assets (NPAs) as a result of their extending unsecured advances to the Richie Rich-es of our society who forget to pay it back to them. Every public sector bank is now struggling with thousands of crores of NPAs.
As part of their task to clean their books of accounts, banks provisioned thousands of crores of rupees in succeeding quarters that wiped out their entire profits. However, by refusing to cut lending rates under various excuses, they have hurt the interests of genuine borrowers who have no intentions to default.
The RBI has projected a lot more easing in food inflation going forward. It is likely that the central bank will further cut its policy rates in the December quarter. However, with banks refusing to budge from their stand, the rate cuts will have zero effect on the monetary transmission.
The new Monetary Policy Committee has been able to make a good start. However, it is for the banks and the government to take the benefit of lower rates to their logical conclusion. Unless the government cracks the whip, commercial banks will spoil the growth script.
