RBI expects banks to lower interest rates from April

While there are widespread expectations of a status quo in policy rates in the first bi-monthly monetary policy statement for 2015/16 , RBI Governor Raghuram Rajan is closely watching the transmission of interest rates by banks to retail and corporate borrowers.

The RBI had reduced the repo rate (the rate at which banks borrow funds from the apex bank), by 50 basis points to 7.50 per cent since January this year.

Past experience of Mint Road indicates that it usually takes three to four quarters for banks to transmit interest rates to borrowers. Rajan, however, was hopeful that banks would start cutting rates from April this year.  

"March is typically a time when banks try and hold liquidity. But as we move into the new fiscal, we will see more transmission to lower interest rates," said Rajan to researchers and analysts in March, when he slashed the repo rate by 25 basis points to 7.50 per cent.

The RBI, which infused liquidity into the system by cutting statutory liquidity ratio (SLR), among other measures, had expected banks to reduce rates faster because of the softening of short-term interest rates, especially commercial paper and certificate of deposits.

Short-term rates have reduced from double-digit to 8.40-8.50 per cent in the last three or four months. Today, there are only a handful of mid-sized banks, including Union Bank of India, United Bank of India and State Bank of Travancore, which have reduced their base rates marginally by 10 to 25 basis points. The current base rate of banks is in the range of 10-11 per cent.

All major banks have stayed away from tinkering with their base rate. The loans to retail and corporate are priced over the base rate.

The country's largest bank, the State Bank of India (SBI), however, has justified not reducing the rates so far.

SBI Chairman Arundhati Bhattacharya has reasoned that there has been a shift of depositors from low-cost current and savings account (called CASA) to term deposits, which is pushing the cost of funds of the bank. For example, SBI's savings rate is 4 per cent, which is quite low, and term deposit rate is 7.50 per cent for one year.

Sensing lower interest rates, depositors are making a beeline for term deposits. This could be a shot-term phenomenon, but has hurt the bank's cost of funds.

In fact, SBI's CASA is also down from 43.89 per cent a year ago to 42.58 per cent. Higher the CASA, higher is a bank's ability to reduce interest rates.     

Some say PSU banks, which control two-thirds of banking in terms of deposits and advances, are delaying the rate cut because of capital and other pressures such as deteriorating asset quality and falling profits.  

"There is a good opportunity for them to make higher spreads by not reducing interest rates for existing and new borrowers," says a banker.