Despite the Reserve Bank of India cutting the repo rate — the rate at which it lends to banks — twice in the past three months, the banks have only now begun making your equated monthly installments (EMI) cheaper. Here’s why the delay.
On Tuesday evening, State Bank of India (SBI), the country’s largest bank, and private sector lender HDFC Bank cut their lending rates by 0.15 percentage points to 9.85%. ICICI Bank followed suit with a 0.25 percentage point cut in its base rate — the floor rate to which all lending rates, including home loans, are linked — by 0.25 percentage points to 9.75%.
The RBI had cut the repo rate by 0.50 percentage points in two tranches in January and March. Yet, the first lending rate cut by banks has come only in April.
Banks usually avoid interest rate cuts during January-March and prefer to wait to gauge the cash position in April.
Banks’ liquidity or cash position, particularly during January to March, is largely determined by two factors: loans given out and deposits taken, and corporate tax payouts in the final quarter of the financial year.
SBI chairperson Arundhati Bhattacharya said: “In India things work differently from international banks. We are very deposit based. If you look at SBI, we have just 1% market borrowing and the rest is basically long term bonds or deposits and deposits are the lion share of it. So, it is based on long term deposits.”
Also, companies pay advance taxes in four installments in each financial year. So, usually, banks prefer to wait until the beginning to new financial year to decide on interest rate changes.
RBI governor Raghuram Rajan has clearly said that banks are awash with funds as corporate weren’t taking any loans.
“Transmission of policy rates (repo rate cuts) to lending rates has not taken place so far despite weak credit off-take and the front loading of two rate cuts,” Rajan said in his monetary policy review. “Comfortable liquidity conditions should enable banks to transmit the recent reductions to their lending rates,” he said.
“Banks will work out their costs of funds and even look into the deposit rates. Their individual asset liability committees will soon meet to take a call on the issue,” TM Bhasin, chairman, Indian Banks’ Association told HT.
Finance minister Arun Jaitley, pitching for low interest rates, said that the government would not pressurise banks. But, he hoped they would soon decide.