India's central bank has taken several policy actions for faster transmission of policy rate cuts to banks' lending and deposit rates. While some benefits of the policy rate cuts, or increases, have been passed on to consumers, there are often several factors that come in the way.
The RBI has now listed out some reasons in its current bulletin.
A larger share of fixed deposit rates
The banks lend based on the deposits that they get from the market. There is a mismatch between the banks' assets (loans) and the liabilities (deposits). The term deposit rates are generally locked in for a longer period of say 3 to 5 years and these rates don't change with the repo rate changes that are reviewed bi-monthly basis by the RBI.
Whereas the banks' loans are linked to the floating rates and changes based on the repo rate changes. This creates a mismatch and often delays the transmission of a policy rate cut to the borrowers.
Past loans priced under the older schemes
Banks' loans like home loans are for a longer period of 15 to 20 years. In the past two decades, there were many benchmark interest rates prevalent like the benchmark prime lending rate (BPLR), base rate and MCLR. These three schemes together account for 71.5 percent of outstanding floating rate rupee loans. The share of loans linked to MCLR stood at 62.9 percent as of March 2021. The method of setting interest rates in older schemes was quite opaque. "The opacity in interest rate-setting processes under the internal benchmark regime hinders transmission to lending rates," the RBI said in its bulletin.
Higher govt savings rates
The higher interest rates offered by postal savings also force the bankers to go slow on cutting deposits rates. The RBI says that interest rates on the various small savings instruments, after being lowered sharply during the first quarter of last year, were left unchanged during the remaining quarters of 2020-21 and also the first half of 2021-22.
Higher default rates
The bank loans are priced based on the likely default rates in the loan segments. For instance, the default rate is higher in unsecured personal or credit cards but lower in home loans. Given the slowdown in the economy in the last three years, the bankers' risk perception has increased. This results in keeping a higher margin for risk, which impacts the transmission of rates as people don't see any substantial reduction in the lending rates despite RBI's policy rate cuts.
Different interest rates charged by NBFCs
The non-banking finance sector, which has total assets of close to Rs 30 lakh crore, follows a different loan pricing strategy. This is because they are catering to a different segment of customers which are mostly not served by the bank. "While some NBFCs use their own prime lending rates as interest rate benchmark, others use base rates or MCLR of banks as external benchmarks; a few do not even have an interest rate benchmark for their loan pricing," the RBI bulletin said.
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