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A few hours after the monetary policy review, two public sector banks — State Bank of India and Andhra Bank — lowered their base rates, prepping the pitch for further rate cuts. With PSBs, and not leading private banks, making the first move, it has obviously raised doubts on whether a tacit pressure from the Centre has prodded these banks to act.
Given that banks have lowered their deposit rates by 1-1.25 percentage points across tenures in the last 6-9 months, the steep cut in repo rate was expected to galvanise banks to lower their lending rates. With most banks lowering their base rates by just about 30 basis points since January, there was enough headroom for them to bring down their loan rates further. Despite this, it was uncertain whether banks would hurry up and lower rates.
This is because for all the hullaballoo over the RBI’s reluctance to cut rates until last year, there has been very little action on the ground by banks after the RBI finally started to cut its policy rate in January this year. It took two rate cuts since January and a rap on the knuckles by the RBI Governor for banks to finally start reducing their base rates. Many banks started to lower their lending rates after the April policy.
But most PSBs have been reluctant to cut their lending rates aggressively. This trend has been very different from the one seen in the past when PSBs were more aggressive and nippy in passing on the rate cuts. In the period between September 2008 and September 2009, for instance, when the RBI cut the repo rate by a steep 425 basis points, on an average public sector banks lowered their lending rates by 128 basis points, while private banks cut their loan rates by just 60 basis points.
In the past, an implicit pressure from the government forced PSBs to lower rates in a hurry. But this time around, public sector banks have had a lot to consider before cutting their rates. If the government has indeed nudged the two PSBs to lower rates, let us hope that this time there are no surprises round the corner.
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