Banks' willingness to cut base rate still muted: RBI

Base rate is benchmark rate to which all loan rates are linked

The Reserve Bank of India has once again pointed out that there is mismatch in the rate at which the central bank reduced the key policy rates and banks bring down the base rate.

Base rate is the benchmark rate to which all loan rates are linked.

“The willingness of banks to cut base rates – whereby they forego income on existing borrowers in order to attract more new business -is muted,” said the RBI annual report.

In this calendar year RBI has reduced repo rate (the rate at which it lends to banks) by 75 basis points where as banks have reduced the base rate by only 25-30 basis points.

Not only RBI but even the government had questioned banks asking them to explain their reluctance in cutting base rate. 

Bankers say that the increase in bad loans has been putting pressure on the margins as increasingly the interest-earning assets are slipping into the non-performing class. This in turn has deterred banks from cutting loan rates. 



Recently, an International Monetary Fund study had also pointed out that lenders in the country are slow in reducing the lending rate.

“There is evidence of asymmetric adjustment to monetary policy -- the lending rate adjusts more quickly to monetary tightening than to loosening. In addition, the speed of adjustment of deposit and lending ratesto changes in the policy rate has increased in recent years,” said the report.