Money & Banking

Private sector banks’ slice of freshrupee loans bigger than PSB share

Our Bureau Mumbai | Updated on October 04, 2019

Monetary transmission has remained staggered and incomplete, says RBI

The response of deposit and lending rates of commercial banks to the cumulative 110 basis points reduction in the policy repo rate during the easing cycle of monetary policy starting from February 2019 has been muted so far, according to the Reserve Bank of India’s monetary policy report.

Monetary transmission has remained staggered and incomplete, it added.

While the weighted average lending rate (WALR) on fresh rupee loans decreased by only 29 basis points (February-August 2019), the WALR on outstanding rupee loans, in contrast, increased by 7 basis points (bps) over the same period. One basis point is equal to one-hundredth of a percentage point

“The inadequate transmission essentially reflects slow adjustment in bank term deposit rates. This, in turn, reflects the long maturity profile of bank deposits at fixed interest rates,” the report said.

Lending activity

The WALR on fresh rupee loans declined during February-August 2019 across bank groups, with the largest decline observed in foreign banks (66 bps) and the least in public sector banks (25 bps). In the case of private sector banks, the WALR on fresh rupee loans declined by 48 bps.

As the lending activity of public sector banks was constrained by higher non-performing assets (NPAs) and lower capital adequacy vis-à-vis private sector banks, the share of fresh rupee loans of private sector banks (49.3 per cent) overtook that of PSBs (39.8 per cent) in August 2019.

Actual lending rates comprise marginal cost of funds-based lending rate (MCLR) and a spread.

Banks charged the lowest spread (WALR on outstanding rupee loans over 1-year MCLR) on housing loans during August 2019 reflecting (i) lower probability of default; (ii) availability of good collateral; and (iii) competition from NBFCs. At the other end of the spectrum, the spread charged on ‘other personal loans’ was the highest.

Administered rates

The report said one of the important factors impeding monetary transmission is administered interest rates on small saving schemes set by the Government of India. These administered interest rates are linked to market interest rates on Government Securities (G-Secs) with a lag and are fixed on a quarterly basis at a spread ranging from 0-100 bps over and above G-sec rate of comparable maturities.

Interest rates on small saving schemes were revised on June 28for Q2 (July-September) 2019-20, which came into effect from July 1, whereby the rates of interest on all small savings schemes (except savings deposit) were reduced by 10 bps.

Even after the reduction, however, the small saving rates of various schemes continued to be higher by 18-62 bps in Q2 2019-20 than the formula-based interest rates.

With the government deciding to keep the interest rates on small savings unchanged for Q3 2019-20 notwithstanding a decline in G-sec yields in the reference period (June-August 2019), the wedge between the current small saving rates on various schemes and the formula-based rates for Q3 2019-20 has widened further to 70-110 bps.

Published on October 04, 2019

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