The column “How to make the horse drink water’’ by Tamal Bandyopadhyay (August 12) was thought-provoking. When rates are cut, banks only pass on a small percentage of the cut to borrowers and that too after a time lag. As for deposits, when banks pare down the rate, it is only for fresh deposits. The old deposits attract the earlier rate.
The transmission of rate cut differentials is a complex exercise that each bank will have to undertake according to the strength of the balance sheet. Banks are accused of being greedy or lazy in passing on benefits of rate differentials to customers. In a complex scenario, banks have to walk a tight rope. The prognosis for the banking sector isn't too rosy. While public sector banks are mired in high non-performing assets, the spike in stressed assets in leading private sector banks is a cause for worry too. Making provisions for these stressed assets will eat into the profitability of the banks.
For the past many years, retail loans have boomed as the upwardly mobile class partook of the easily available credit facilities, be it in the form of loans or credit cards, to augment their lifestyles. Now with the slowdown and question marks over the job scene, the cash flow is drying up. The steep fall in the growth of the automobile sector is a case in point. With a lucrative stream of income showing signs of tapering off, banks will become tight-fisted in passing on additional benefits to customers.
Legal remedial measures to sort out the stressed assets issue hasn’t really taken off as expected. Banks will need help to recover their money. Till such time, they cannot be expected to be proactive in the transmission of the benefits of rate cuts to customers. If help is given to shore up their bottom lines, banks will likely come out with more customer-friendly measures.
K V Premraj, Mumbai
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