Banks have not passed on RBI's rate cuts to borrowers in 2019: Economic Survey

It appears that there has been no transmission of the cut in repo rate to lending rats of banks in 2019, says the Economic Survey. According to the Survey 2019-20, the existing borrowers are not benefitted from the Reserve Bank of India's (RBI) repo rate cut throughout the year 2019-20. The Economic Survey says that the Weighted Average Lending Rate (WALR) of Scheduled Commercial Banks (SCBs) has not declined at all in 2019 despite reduction of repo rate by 135 bps since January 2019. 
 
This statement of Economic Survey 2019-20 backs the criticism levelled at banks by home loan borrowers and other borrowers saying that the banks have not passed the benefits of repo rate cut to them. In the calendar year 2019, RBI has reduced the repo rate by 135 basis points (bps) in five successive rate cuts starting from February 2019. 
 
As reported by The Economic Times, the credit spread (difference between repo rate and WALR) is at the highest level in this decade. WALR on outstanding loans of SCBs is 525 bps higher than the repo rate, suggesting that there has been no transmission of the cut in repo rate to lending rates of the banks in 2019, says the Survey. 
 
According to the Economic Survey, WALR on outstanding rupee loans of SCBs was 10.38 per cent in January 2019 and 10.40 per cent in October 2019. The monetary transmission has been slightly better for fresh loans. WALR on fresh loans of Public Sector Banks reduced by 47 bps and that of Private Sector Banks reduced by 40 bps from January to October 2019. However, even this has been much less than the repo rate cut of 135 bps (in 2019). 
 
The Economic Survey further says that there has been a reduction in the saving deposit rate by 25 bps in 2019. The term deposit rate which is more important has seen a decline of only 16 bps from January 2019 to October 2019. An important limiting factor seems to be the rate on small savings scheme like Public Provident Fund (PPF). 
 
FD-vs-PPF
In 2014, the Weighted Average Term Deposit Rate (WATDR) was same as PPF, however the gap between them is 115 bps at end October 2019. It is unlikely that the term deposit rates can decline without a decrease in administered rates on schemes like these.
 

 

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