Have banks formed a cartel to keep lending rates high?

Das said banks have passed only 0.29 per cent in rate cuts to their borrowers as against 0.75 per cent cuts in interest rates by the Reserve Bank till June.

Illustration: Dominic Xavier/Rediff.com

Banks have passed on only a little more than a third of the benefits they have accrued so far from the past three successive rates reductions of 75 bps by the Reserve Bank to the borrowers, governor Shaktikanta Das on Wednesday said urging them to do more.

Lowering the cost of borrowing can help prop up fresh investments and consequently push the sagging economic growth and with today's unprecedented 35 bps repo rate cut to 5.40 per cent the cumulative reduction since February is a hefty 110 bps.

Das said banks have passed only 0.29 per cent in rate cuts to their borrowers as against 0.75 per cent cuts in interest rates by the Reserve Bank till June.

He said banks have taken this stance despite financial markets, on which they depend for money, moving in tandem with the RBI actions and fully absorbing the rate cuts.

However, Das was quick to dismiss allegations that the banks have formed a cartel to keep the lending rates high.

"We expect higher transmission of policy action and stance by the banks in the weeks and months ahead," Das told reporters after the announcement of the policy review where it has lowered the key rates by an unconventional 0.35 per cent in a 4:2 votes of the rate setting panel.

"Our interactions with various stakeholders, including public and private sector banks, indicate that steps are being taken by them on an on ongoing basis to progressively lower their interest rates so that the benefits of policy rates reductions are fastened to the economy," Das said.

It can be noted in the last months, Das has separately met representatives of public and private sector banks ahead of the policy review.

He said financial markets across categories are reflecting the RBI's rate cuts.

"...policy impulses have been transmitted through financial markets fully. The weighted average call money rate has declined by 78 bps, market repo rate by 73 bps and 10-year benchmark by 102 bps," he said.

Holding on to higher rates helps banks to expand on net interest margins and expand profit.

To a question on why is the RBI not moving ahead with the plan to link banks' lending rates to external benchmarks, Das said when banks have slowly started to come out of the NPA mess and falling deposit growth does not make it suitable for such a mandate to be pushed down their throats.

Asked if the shift to external benchmark is off the table, he said, "We are again having stakeholder consultation and we have put it for review."

Originally, the external benchmark was supposed to be introduced in April but there was no progress on the same, except a few moves by SBI.

"We are monitoring the situation and RBI will take whatever steps that are required to ensure transmission," Das said.