Banks face RBI heat on no rate cut

Central bank says spread reduction not good enough, base rate should be slashed

The Reserve Bank of India (RBI) has come down heavily on banks for not cutting interest rates, despite a reduction in the policy rate by as much as 50 basis points (bps) in April. In the pre-monetary policy meeting with bankers on Monday, the central bank wanted to know the reasons for the failure of policy transmission.

Following the reduction in the repo rate in April, some banks reduced their base rate — the benchmark rate — by only 10-25 bps.

Bankers have justified their action on the grounds that they did not increase rates when RBI increased the policy rate in September and October last year.

MONETARY SEE-SAW

• Banks ask for 50-bp cut in repo rate in the first-quarter review of monetary policy
• Divided house on CRR as liquidity comes back
• RBI concerned over slow pace of deposit growth
• Investment in alternative asset classes hurting deposit growth

“RBI emphasised for monetary transmission to be effective, the base rate should be reduced and not the spreads alone,” said a banker who attended the meeting.

SBI and Union Bank of India have cut interest rates in some segments in the range of 50-350 basis points. While SBI is yet to cut its base rate following the reduction in the policy rate in April, Union Bank has reduced it by 15 bps. SBI also slashed interest rates for exporters by 50 basis points
Bank	Base rate	Reduction in base rate*	Rate cut for agri and MSME*
State Bank of India	10%	Nil	50-350 bps
Union Bank of India	10.50%	15 bps	50-350 bps
*Since the policy rate cut in April                                          Source: Banks

Some of the banks, including State Bank of India (SBI), had effected steep cuts in the spreads for loans in some specific categories like education loans and loans to small and medium enterprises but did not lower the base rate. SBI’s base rate, at 10 per cent, is the lowest among all public sector banks.

Interestingly, following RBI’s repo rate cut, two large private sector lenders, ICICI Bank and HDFC Bank, reduced their base rate by 25 bps and 20 bps, respectively. On Monday’s pre-policy meet, which deliberated extensively on policy transmission, was attended by deputy governors of the central bank and leading bankers.

ROOTING FOR RATE CUTS

"CRR cut helps bottom lines of banks; that obviously is the best choice. But, if repo rate (cut) is also there, like China has already reduced it, then it is a signal to the market. The government will also be doing many things; then I think we will be moving forward"

Alok Mishra, IBA chairman and Bank of India chairman and managing director

"Some amount of easing is what most bankers want... in what form it will come is up to RBI"

Diwakar Gupta, SBI MD and chief financial officer

"If the inflation rate, particularly non-food manufacturing, shows signs of decline, then there will be scope
for RBI to adopt an easier stance"

C Rangarajan, PMEAC chairman

The central bank also raised concern over the slow pace of bank deposit growth, lagging for a couple of years mainly due to lower real returns to depositors. With inflation hovering around the double-digit mark for two years, real returns to depositors became negative.

Deposit growth stood at 14.3 per cent year-on-year in the fortnight ended June 15 as compared to 18.3 per cent for the same period last financial year. RBI has projected 16 per cent deposit growth for this financial year. Though most bankers demanded a reduction in the policy rate, they were divided on the issue of a cut in the cash reserve ratio.

While a cut in the CRR will release funds, which could be deployed to earn interest rate, the easing of the liquidity position has made the chances of such reduction lower. The RBI has reduced the CRR by 125 bps in 2012.