Banks have not passed full benefit of low interest rates to borrowers

The Reserve Bank has been aggressively signaling lower rates to revive the economy since the pandemic induced nation-wide lockdown by making the cost of borrowing cheaper, but banks have transmitted less than half of these rate cuts, writes The Economic Times.
Despite the RBI signaling 115 basis point(one bps is 0.01%) reduction of its benchmark repo rate since March 2020, weighted average lending rates have fallen only by 40 bps and 50bps on outstanding and fresh loans respectively between April and November. 
Economists attribute this to the structure of deposit rates in Indian banks. The banking system in India relies heavily on retail deposits compared with wholesale or market-based funding mechanisms. On average, term deposits – the costs of which are effectively ‘locked’ for banks – account for more than 40% of banks’ sources of funding. 
Banks face an asymmetry in interest rate settings between their deposits and loans. While almost all bank deposit accounts are offered at a fixed interest rate, 80% of bank lending is done via floating rate structures, according a recent research by Barclays Capital. 
Another trend is that public sector banks have cut rates on lending more than their private sector counterparts. Weighted average lending rates on fresh loans have dropped 68 bps between April and November for public sector banks compared to 36 bps for private sector banks. 
Loans grew by around 6% year-on-year, until December 2020. But much of the growth has been through government supported schemes like, The Emergency Credit Line Guarantee Scheme (ECLGS) under Atmanirbhar Bharat. Most of the beneficiaries under the scheme are medium and small sized firms, according to Care Ratings.



To continue

Sign Up or Sign In


We are listening!

Solve the equation and enter in the Captcha field.