Banks await rules for marginal cost-based pricing

Revised small-savings rate regime to weigh on decisions

The Reserve Bank of India (RBI) has often ticked off banks for doing little to pass on the benefit of repo rate cut to borrowers. The banks concede there's room for further easing, but prefer to wait for the details on rules for marginal cost-based loan pricing and linking small savings rate to market benchmark, before taking the plunge.

Public-sector banks, saddled with huge stressed assets, have reasons for taking more time to reduce their lending rates. They are facing high credit costs - amounts that they have to provide for non-performing assets (NPAs) - and reversal of part of the interest income for accounts that have turned NPAs. It is a precarious issue when the growth in loans and interest income remains weak.

RBI in its policy statement said since the rate reduction cycle that commenced in January, less than half the cumulative policy repo rate reduction of 125 basis points (bps) has been transmitted by banks. The median base lending rate has declined only by 60 bps.

The banking regulator will shortly finalise the methodology for determining the base rate based on the marginal cost of funds. The government is examining how to link small savings interest rates to market interest rates. These moves should further help transmission of policy rates into lending rates.

For faster transmission of rate cuts, RBI is looking at shifting to the marginal cost of funding to calculate the base rate, said a senior private bank executive. Banks will like to assess the effects of details before resuming rate cuts.

The interest rate being offered by banks on a deposit for a year hovers around 7.50-8 per cent, much lower than the 8.7-9.3 per cent being offered on small saving schemes. The fear of losing marketshare due to lower rates also make banks reluctant to reduce their deposit rates further and, consequently, the lending rate as well.

Two officials with a Mumbai-based public sector bank said it's not that the banks are reluctant to cut rates; instead, the lenders are only waiting for the cost of funds to come down.

"As an industry average, typically, banks have 70 per cent fixed deposits and 30 per cent is the mix of current and savings account. And as a thumb rule, at least 50 per cent of the fixed deposits are of one year maturity and, therefore, we need to wait for the cost of funds to come down immediately. But it does not mean banks are reluctant to cut the rates; it will happen just that it will come with a lag effect," said Ashutosh Khajuria, executive director, Federal Bank.