With the Reserve Bank slashing the key lending rate by 100 bps to 5.5% since February, the cost of funds in general, especially for depositors, has been on a southward-ho.
It’s not that borrowers haven’t benefitted, they did, especially those on the repo-linked floating rates, but not to the extent of the loss of depositors. Analysts see more downward pressure on the pricing of term deposits, even as the savings bank deposit rates have hit the rock bottom at 2.5% at the country’s largest lender SBI.
Repo-linked loans constitute only about 45% of the credit system. Though by definition when the RBI cuts repo rates, the existing lending rates have to fall in equal proportion, banks some leeway in passing on the same to the rate re-set date, which normally begins on the first day of every month. Banks can also set internal thresholds based on the quantum of the borrowed amount, in not fully lowering the rate. A borrower of a home loan with an outstanding of say `25 lakh should get `4 lakh in interest benefits alone with the 100 bps reduction in repo rate since February — 25 bps each in the February and April reviews and an unconventional 50 bps in the June policy review. But so far banks have not passed on these cuts entirely.
Governor Sanjay Malhotra at the June review told reporters that the monetary policy transmission—which is the central banking jargon for lenders passing on the RBI rate reduction to borrowers--has been slow so far. A reason why he made an another unconventional move of reducing the CRR by 100 bps to 3% in four equal installments beginning September 1 and ending on November 29 when banks will be flushed with Rs 2.5 trillion of additional liquidity.
He said the weighted average lending rate (WALR) on fresh rupee loans and outstanding rupee loans declined only by 6 bps and 17 bps, respectively, during February-April, reflecting a very slow policy rate transmission to lending rates. On the other hand, the governor said the weighted average domestic term deposit rates (WADTDR) on fresh deposits declined by 27 bps, while WADTDR on outstanding deposits declined by 1 bp during this period when the repo rate declined by 50 bps.
Anil Gupta, a senior vice-president and co-group head of financial sector ratings at Icra Ratings, expects the peak term deposit rates of banks to decline further by 25 bps from now.