Banks not responsive to rate cuts: RBI

RBI REPORT ON TREND AND PROGRESS OF BANKING IN INDIA 2007-08

The Reserve Bank of India (RBI) On Wednesday said the benchmark prime lending rate (BPLR) of banks show upward flexibility during monetary tightening, but the benefits of easy liquidity are not passed on to borrowers when the cycle reverses.

“BPLRs exhibit upward flexibility during monetary tightening, but downward rigidity during monetary easing, which impedes the monetary transmission mechanism. As such, these rigidities do not allow the benefits of easy liquidity conditions to be passed on to the borrowers,” RBI said in its Report on Trend and Progress of Banking in India 2007-08 released On Wednesday.

The central bank, which usually refrains from asking banks to change rates, added: “Banks should do a careful review of their lending rates based on change in the inflation outlook, the domestic liquidity conditions and their cost of funds.”

While expecting a high demand for credit in the domestic market due to depleting overseas funding and equity markets drying up, RBI said banks have to ensure adequate credit flow to agriculture and small and medium enterprises (SMEs).

The statement on interest rate movement comes at a time when many banks, especially the private sector players, are yet to lower their BPLR despite RBI reducing the repo rate, or the rate at which it lends to banks, by 250 basis points since October 11. To signal the declining interest rate regime and encourage banks to lend instead of parking surplus cash through the liquidity adjustment facility, RBI also cut the reverse repo rate by 100 basis points to 5 per cent, the lowest since April 2005.

In addition, since October, the Cash Reserve Ratio (CRR), or the proportion of deposits set aside by banks, has been lowered 350 basis points to 5.5 per cent. The move has helped banks earn returns on cash, which was otherwise with RBI and did not earn any interest.

Despite the steps taken in the last two months so far, public sector banks have lowered lending rates by 50-150 basis points, while a handful of private sector lenders such as HDFC Bank and Yes Bank have each announced a 50-basis point reduction in BPLR. Banks have maintained that the cost of funds still remained high as they had raised deposits at 10-11 per cent to meet the high credit demand following the crisis in the US and other overseas markets.

Up to November this year, scheduled commercial banks increased deposit rates for various maturities by 50-175 basis points. Public sector banks were offering 9-10.5 per cent on deposits with maturity of one year to three years as against 8.25-9.25 per cent in March 2008. The rates, however, fell by around 50 basis points in December.

In contrast, BPLRs of these banks rose to 13-14.75 per cent by November 2008 from 12.25-13.5 per cent in March 2008. During the period, private sector banks and foreign banks also increased their BPLR to 13-17.75 per cent and 10-17 per cent from 13-16.5 per cent and 10-15.5 per cent respectively.

The change that has been witnessed since September this year is the decline in the share of sub-BPLR lending in total lending of commercial banks, excluding export credit and small loans. At the end of March 2008, the share of sub-BPLR lending was estimated at 76 per cent.