By Ruma Dubey

"RBI, in very short period of time, has cut repo rate twice. It is expected from the bankers that they pass on the benefits (to consumers)," said RBI Deputy Governor S S Mundra.

How very true. There have been two rate cuts, 25 bps each; that makes it 50 bps in 2015 till now. Yet, there has been no movement from any bank to reduce rates. Especially after the second rate cut, it was expected that banks would toe the line and bring in that token 25 bps rate cut at least. But nothing came through. Banks continue to sit on the 50 bps rate cut while we celebrate the fact that RBI has initiated a downward rate cycle. So who exactly has benefitted till now with any of RBI’s rate cut? There were headlines which screamed that EMIs will come down, loans will become cheaper. Really? It is all status quo, as though there has been no rate cut at all.

Banks are so fast to hike up rates the moment RBI increases rates but why not when it comes to reducing rates? Talking about reducing, banks are indeed reducing rates! Well, not lending rates but deposit rates.  First Bank of Baroda reduced the interest rate for deposits below Rs.1 crore by 10 bps for select maturity brackets and soon Axis Bank cut its deposit rates by 25 bps on select deposit slabs. And prior to these two, at the beginning of 2015 itself, most others, including SBI, HDFC Bank and ICICI Bank reduced deposit rates.

So why are banks cutting deposit rates and not lending rates? Banks argue that to cut lending rates, deposit rates need to fall before banks become comfortable to cut lending rates. They say that there is a lot of liquidity sloshing in the market and to address that, it needs to first cut deposit rates. They prefer to wait for the April policy before cutting lending rates.

Can that be reason enough? Actually there are some other factors too, apart from pure commercial sense and greed which is preventing rate cut. Some argue that banks had to keep a hold their short term liquidity as they had to bring up funds to pay the advance tax, which was due on 15^th March. Thus they preferred to take a decision only after that. Others argue that credit growth has been low and if rates were also reduced, their earnings and already pressurized margins could get hit. And while on costs, poor asset quality and higher deposit costs have led to higher provisioning; this in turn meant lending costs cannot be pared or else margins could get affected further.

Talking about margins, the biggest worry for banks is NPAs only. There is major stress to bring down bad loans and all efforts are currently focused on that. In this circumstance, they feel they do not want to reduce rates and bring in more borrowers – they would rather first close this fiscal and make a new beginning from FY16.

Based on these set of arguments and reasoning, it seems pretty clear that banks will not give in to RBI pressure as of now; they will wait for the new fiscal to begin while some will wait for the RBI policy on 7^th April.

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