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Hitting out at banks in its Annual Report for 2014-15, the Reserve Bank of India has once again pointed out the gap between reduction in key policy rates and bank’s lending or base rates.
Base rate is the benchmark rate or the minimum lending rate that banks offer.
Even as banks and the Government have been questioning banks on their reluctance to cut rates, bankers reason that repo rate is not the only factor in cutting base rates. Weak credit pick-up and increase in bad loans in the banks’ books has also been putting pressure on the margins as increasingly the interest-earning assets are slipping into the non-performing assets.
In order to improve the monetary policy transmission mechanism under the existing base rate system, RBI said it will be identifying the impediments in pass-through and implement an alternative method, such as marginal cost based credit pricing or identifying an appropriate benchmark for the bank lending rate as a priority.
“The willingness of banks to cut base rates – whereby they forego income on existing borrowers in order to attract more new business -- is muted… Base rates are found to be sticky and impeding transmission of monetary policy,” said the RBI annual report.
Since January this year, RBI has reduced repo rate (the rate at which RBI lends short-term money to banks) by 75 basis points where as banks have reduced the base rate by only 25-30 basis points.
RBI will also provide liquidity support progressively through regular auctions of longer term repos with reduced dependence on overnight fixed-rate liquidity support.
Recently, an International Monetary Fund study also pointed out that lenders in the country are slow in reducing the lending rate.
“There is evidence of asymmetric adjustment to monetary policy -- the lending rate adjusts more quickly to monetary tightening than to loosening. In addition, the speed of adjustment of deposit and lending rates to changes in the policy rate has increased in recent years,” said the report.
ICRA Ratings agency expects banks’ base rate rates to decline by an additional 25-50 bps over the next one year as term deposits get re-priced
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