Private sector banks failed in passing benefit of low interest rates to borrowers

Private sector banks failed to match the Reserve Bank of India's reduction in the interest rate in the past year to ease the pain inflicted by Covid-19.
 
Comparatively, state-owned banks have been generous in extending the benefits to borrowers by reducing more than the central bank, writes The Economic Times.
 
The average fall in lending rates for banks such as Axis Bank, ICICI Bank, Federal Bank and DCB was about 22 basis points on fresh loans compared with RBI's 115 basis points reduction in the past year. A basis point is 0.01 percentage point. But the reduction of benchmark rates by state run banks such as the State Bank of India, Indian Overseas Bank was 120 basis points, data from the central bank shows.
 
Banks not passing on the benefits of lower cost of funds has been a festering issue for decades. The central bank had tried every trick in its book to ensure monetary transmission which is often found to be slow when the rates go down, but quick to go up when the interest rate cycle moved up. It forced banks to link their lending to an external benchmark to ensure market related movement.
 
Weighted average lending rates on fresh loans fell from 8.64 per cent in March'20 to 7.44 per cent by March'21 for public sector banks. The same for private banks fell from 9.29 per cent to 9.07 per cent during the period. RBI's benchmark repo rate was lowered from 5.15 per cent to 4 per cent over the period.
 
The lack of transmission has helped private banks report better profitability than their public sector peers. But it is also a fact that concentration of lending to higher yielding retail, unsecured borrowers has boosted private sector’s profit margins.
 

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