Would have been happier if there was more transmission: Rajan | business-news | Hindustan Times
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Would have been happier if there was more transmission: Rajan

Rajan on Tuesday criticised banks for not passing on previous rate cuts announced by the central bank, and for finding reasons to delay rate reductions.

business Updated: Aug 09, 2016 22:22 IST
Since January 2015, the RBI has cut key policy rates by 1.50%, while the transmission of these rate cuts into banks’ lending rates has been by around 0.80%.
Since January 2015, the RBI has cut key policy rates by 1.50%, while the transmission of these rate cuts into banks’ lending rates has been by around 0.80%.

Rajan on Tuesday criticised banks for not passing on previous rate cuts announced by the central bank, and for finding reasons to delay rate reductions.

“Despite easy liquidity, banks have passed past rate cuts only modestly. Earlier, some bankers said it was the lack of liquidity that was holding rates high. Now I hear from some that it is fear of the FCNR(B) redemptions that is making them reluctant to cut rates. I have a suspicion that some new concern will crop up once the FCNR(B) redemptions are behind us,” said Rajan.

Since January 2015, the RBI has cut key policy rates by 1.50%, while the transmission of these rate cuts into banks’ lending rates has been by around 0.80%.

“We would be happier if there was more transmission. My sense is that as the process of clean-up (of bad loans) happens and as credit demand also picks up, there will be more possibility of transmission,” said Rajan.

But according to banks, the move depends on the cost of deposits.

There are various factors in the new method for calculating bank rates, and only if all parameters are in line can a rate cut be passed on, said Rajnish Kumar, managing director, SBI. “For the MCLR (marginal cost-based lending rate), there are four components - cost of deposits, cost of negative return on CRR, return on networth and operational costs – that determine the changes in interest rates. The only variable is the cost of deposits. The deposit growth is very slow. So, banks in these circumstances are reluctant to reduce deposit rates.”

State-run banks have high dependence on retail deposits, which have costs. For instance, if a person has opened a fixed deposit at an 8% interest, banks have to pay them the interest despite reduction.

Under MCLR, while reduction in rates happens automatically, since deposit rates are not reduced, lending rates are also not being cut.

Banks also pointed at the importance of the economic scenario for lowering lending rates. “Probability of default lessens on account of improvement in macroeconomic scenario. Then the risk premium on MCLR also comes down. Then banks can cut rates. More than interest rates, the investment demand is yet to pick up,” said SBI’s Kumar.