Banks being too stingy? ICICI, SBI, HDFC Bank finally cut lending rates

Three big lenders — ICICI Bank, State Bank of India (SBI) and HDFC Bank — were quick to reduce their lending rates by up to 25 basis points (bps) on Tuesday evening, after the Reserve Bank of India (RBI) chose to hold the key rates steady in its bi-monthly policy, citing lack of monetary transmission as a major hurdle. One bps is one hundredth of a percentage point. While ICICI Bank cut its base rate, or minimum lending rate, by 25 bps to 9.75 per cent, the other two opted for a 15 bps cut that lowered their base rates to 9.85 per cent. Reduction in base rates, theoretically, benefits all categories of customers, whose loans are linked to the benchmark rate. Other banks too would cut their base rates by similar margins in the days ahead since the market leaders have taken the plunge. But the point to be noted here is that this round of rate cuts were already due for long and is by a significantly smaller quantum, compared to the 50 basis points cut by RBI in its key rates since January. [caption id=“attachment_2188481” align=“alignleft” width=“380”]  Rajan during the policy meet yesterday. PTI image[/caption] Banks typically up their loan rates fast when policy rates go up, but are slow in responding when the RBI reverses the direction. Banks’ rate actions were already scheduled for April on account of mounting pressure on banking system and in the backdrop of fall in deposit rates, rather than prompted by Tuesday’s status quo or Rajan’s ultimatum to banks. Indeed, the language of the policy would have certainly hastened the process. Rajan is certainly an unhappy man with banks’ lack of enthusiasm in passing on the policy rate signals from the central bank, which is reflected in his language at the presser that followed the policy announcement. “I do not see an environment where credit growth is tepid, banks are sitting on money and their marginal cost of funding (has) fallen, the notion that it hasn’t fallen is nonsense, it has fallen,” Rajan said. In the policy document too, for the first time perhaps, lack of monetary transmission topped the list of RBI’s concerns even before inflation risks have found mention. “Going forward, the accommodative stance of monetary policy will be maintained, but monetary policy actions will be conditioned by incoming data. First, the Reserve Bank will await the transmission by banks of its front-loaded rate reductions in January and February into their lending rates,” it said. The central bank’s concerns evidently stem from the stubbornness of banks to lower their lending rates despite a visible slowdown in the credit offtake in the banking system, especially that to industries, one of the reasons that has, in turn, contributed to the anaemic growth in the real economy, core sectors in particular. The 25 bps lending rate cut is indeed a relief to the retail customer since there will be some ease in his EMI burden, but it is certainly not sufficient enough to give a big relief. There is also a risk that the happy part can end there, since banks are likely to limit their response with this small dose and may wait for further rate actions, at least another half a percentage point cut, by the central bank before acting further. This depends on several other factors — the rains and oil prices, to name a few. Banks have reduced their lending rates almost after a year, despite slow credit growth and abundant liquidity in the system. The villain, as banks have pointed out, was the high cost of funds of banks, which continue to put pressure on their margins. But, with the central bank cutting repo by half a percentage point and banks going for at least two rounds of deposit rate cuts, the cost of funds have indeed fallen, making room for lending rate cuts. Bank earnings continue to be under pressure from still high bad loans and restructured loans, and they are hesitant to cut loan rates and expand their loan books further before repairing their damaged balance sheets. As for the common man, he is still at the receiving end. While big companies have mostly moved towards the cheaper corporate debt market and borrow money at around 8.5 percent, individual borrowers still get loans close to 10 percent. Secondly, banks hardly lend to retail borrowers at the base rate. They put a premium above the base rate and typically play with the premium to decide the final rate. The RBI has tried to address the anomaly in base rate calculation by asking banks to change the methodology based on the marginal cost of funds, instead of average cost of funds. The Reserve Bank, under Rajan, is trying to regain its lost power to influence the banks on transmission of monetary policy cues, by various ways including reworking the base rate methodology, frequency of calculation period and citing this as a primary concern in the policy document, which is arguably an unprecedented move. Kudos to Rajan for fighting for the common man.