PSU banks relayed RBI rate cut better than private sector peers

Mumbai: State-run banks have taken a lead in transmitting lower interest rates, reducing it by more than 40 basis points since March. In contrast, private-sector lenders have done just a fifth of it, which puts their customers at a disadvantage.The overall transmission has also been lesser than what the Reserve Bank of India would have desired even though deposits have been surging and the loans demand have been tepid.Monthly weighted average lending rates on fresh loans slipped 28 basis points for commercial banks between March and May, data from the RBI showed. The central bank lowered interest rates by 115 basis points between March 27 and May 22 in two tranches in an attempt to revive loan demand amid the nation-wide lockdown, which caused the collapse of economic activity. A basis point is 0.01 percentage point.State-run banks have lowered the rates by a wider margin — 46 basis points — compared to their private-sector peers who lowered the rates by a net of 8 basis points.“The reduction in lending rates could have been due to a push by the government,” said Karthik Srinivasan, head of financial sector ratings at Icra, the local unit of Moody’s Investor Services. “But deposit growth has been pretty strong for public sector banks. They are also having surplus liquidity. Besides, the fall in G-Sec yields is likely to have given them more room to cut rates.”After lowering rates by 38 basis points in April, private lenders raised interest rates on fresh loans in May by another 30 basis points. But foreign banks which account for less than 10% of the loan given, lowered rates by 109 basis points.Chetan Ghate, the external member of the monetary policy committee (MPC) who had voted for a 25 basis points reduction in the benchmark repo rate in the May 22 meeting, had warned that the sizeable breach in fiscal deficit target would adversely impact transmission in credit markets, according to the MPC minutes.“What compounds this is the rising risk aversion in the financial system will get exacerbated by a looming spike in NPAs because of the loan and mortgage holidays announced. This will hinder transmission even more,” Ghate had said in the meeting, according to the minutes.Weighted average lending rates on outstanding loans for private sector bank dipped by 14 basis points compared to 10 basis points for public sector banks. This is because public sector banks have a larger share of fixed-rate loans compared to the private sector peers which have a larger share of floating-rate loans. These get revised immediately after a rate cut.

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