Rate cuts have actually hurt depositors more!

Experts say lending rates won’t come down significantly,as banks are grappling with NPAs

It’s been a double whammy for retail borrowers and investors, who continue to pay higher interest rates on loans while earning lower returns on their deposits. The Reserve Bank of India (RBI) has cut policy rates by 150 basis points (bps) in the past 15 months (since January 2015), but banks have reduced lending rates only by around half of that.

There has also been a 20 basis-point cut since the introduction of Marginal Cost of Funds-based Lending Rate (MCLR) regime on April 1.

Borrowers, obviously, have not benefited so much. In May 2011, an investor in State Bank of India (SBI)’s one-year fixed deposit rate would have earned 8.25 per cent whereas a home loan borrower would have paid 9.75 per cent (for loans of Rs 30-75 lakh).

Today, an investor in the one-year fixed deposit would earn 7.25 per cent and a home loan borrower would pay 9.5 per cent. In other words, the deposit rate has fallen by 100 basis points whereas the borrower’s rate has declined by just 25 bps, according to data from Bloomberg and SBI website.

Even a small reduction of 50 bps in lending rate can bring down the equated monthly instalments (EMI). It will also increase eligibility. If an individual can afford an EMI of Rs 70,000 a month at 9.5 per cent interest rate, he can get a home loan of Rs 75.1 lakh for 20 years. If the rates fall by 50 bps, he can borrow Rs 2.7 lakh more.

Banks had initially said they were unable to reduce the rates as they had to keep the deposit rates high to compete with the small savings schemes. Following this, the finance ministry reduced the interest rates and changed the periodicity at which interest rates on small saving schemes are calculated – from annually to quarterly. On various schemes, the rates were cut between 0.4 per cent and 1.3 per cent.

As the base rate proved ineffective for rate transmission, RBI came up with a new benchmark, MCLR. This was supposed to bring down the lending rates by banks faster than in the era of base rate. But in the two months since its implementation, MCLR, too, has proven ineffective. Acknowledging this, RBI Governor Raghuram Rajan termed MCLR a work in progress and said the central bank would review its implementation.

Rajiv Anand, executive director (retail banking) at Axis Bank, says: "The Reserve Bank of India wants to review the MCLR essentially to see if there is any impediment in the structure that is potentially impeding banks from lowering lending rates. But, ultimately, what rate banks lend at is a function of what rate we borrow. Now, the MCLR is the formula for setting the lending rate. While deposit rates have fallen, it will take some time for lending rates to come down."

Analysts believe it will take at least two quarters before banks go for any meaningful reduction in lending rates. According to global rating agency Moody’s, the transmission of monetary policy will depend on the progress in the clean-up of banks' balance sheets.

Sahil Kapoor, chief market strategist at Edelweiss Securities, explains: “Public sector banks don’t have the comfort to bring down their lending rates as they are grappling with the non-performing assets (NPAs) at present. Due to NPAs, they are facing liquidity problems and there hasn’t been any significant deposit growth. Unless the government infuses capital, they don’t have much choice.”

Siddharth Purohit, senior research analyst at Angel Broking, agrees. “Any significant lending rate cut should happen after two quarters, once the deposit rates come down further.”

So, keep your expectations low — at least for six months.

Photograph: Danish Siddiqui/Reuters