RBI rues low transmission of rate cuts into bank lending rates

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Reiterating that there has hardly been any transmission of policy rate rate cuts into bank lending rates, the Reserve Bank of India (RBI) on Monday said while it has cut the policy rate by 150 basis points (bps) from January 2015 to April 2016, the median base rate has fallen 60 bps.

The decline in median deposit rates stood at 92 bps in the same period, the RBI added.

The central bank said this reflects banks’ preference to protect profitability in the wake of deteriorating asset quality and higher provisioning.

“The weighted average lending rate (WALR) on fresh rupee loans declined by 100 bps (up to June 2016), significantly more than the decline of 65 bps in WALR on outstanding rupee loans,” the RBI said.

“While the cost of funding by banks has declined somewhat leading to a decline in shorter maturity MCLR, there has been an increase in the term premia in respect of term loans of one year and above, thereby attenuating the transmission to actual lending rates charged to customers,” it added.

The central bank explained that banks may have been loading a higher credit risk premia on their new customers in order to attain their desired return on net worth in a rising NPA environment.

The central bank said banks may also have been charging a higher strategic risk premia on their riskier loans as part of their business strategy to reorient their lending operations toward less risky activities.

“The consequent rise in the spread is reflected in a near unchanged WALR in respect of both outstanding and fresh rupee loans during 2016-17 so far (up to June),” it said.