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.



To continue

Sign Up or Sign In


We are listening!

Solve the equation and enter in the Captcha field.

Changes in Our Business Model
Greetings from Moneylife Advisory Services
Between financial years 2019-21, SEBI has come up with extensive changes to investor advisor regulations. On Sep 23, 2020, SEBI had issued new additional guidelines. This comes just two months after extensive changes announced in July 2020. Earlier, in December 2019 there was an ad hoc circular
As a result of these changes, IAs, cannot accept fees through credit cards, will have to sign a 26-clause investor agreement, have to maintain physical record written & signed by client, telephone recording, emails, SMS messages and any other legally verifiable record for five years. IAs were already asked to record the suitability and rationale for every piece of advice given, sign them and store them for five years.
While these extensive and frequent changes, designed to strengthen the conduct of IAs are well-meaning, these have sharply increased compliance efforts and cost. We, being online advisors, find many of changes harder to implement, compared to advisors working in the physical space. We will have to have an army of advisors, administrative and tech staff to be compliant. If we do this, we will have to divert money to these areas and the cost of our service will double. We want to remain the least-cost service in the market to benefit more and more people. In the circumstances, we are forced to change our business model from “advisory” to “research”. This will mean the following:
What remains the same:
  • Recommendations on insurance, investment and Lion stocks, will continue as a part of the MAS premium subscription. Our strength has always been research and this will remain available to you through our recommendations.
  • The magazine and all textual content will remain as part of the service
  • The investools will have to be reworked and will offer model portfolios. We will have to suspend the restructuring tool.
What changes:
  • The interactions in Ask / Handholding will offer investment advice but not specific to your situation. It will offer information on investment products and also clarify your doubts about various financial products. It will be a forum for information, not for advice. This will be implemented with immediate effect and our guidelines in Ask, reflect this now.
Over the next few weeks our site and our communication to you will reflect these and other additional changes.
We feel this will not affect you much in terms of what really matters in investing: knowing what to buy and when to buy. This is our edge and it will still be available to you.
Debashis Basu