RBI has left its benchmark repo rate unchanged at 6.5% for 8 months after raising it by 250 bps over a ten-month period. However, even now, the transmission of those hikes remains uneven and incomplete for both deposits and loans, be it for existing or new borrowers.
What's puzzling is that, the last rate hike of 25 bps was delivered in February, and RBI hoped that a pause will allow lenders to gradually pass on the entire quantum of 250 bps rate hikes to consumers. However, in the past six months, transmission has remained next to nothing on both fresh and outstanding loans. Shockingly, rates on fresh deposits didn't increase, but rather fell soon after the central bank pressed the pause button in April.
The question that arises now is whether one can see full transmission of rate hikes as time goes by.
On Friday, during the customary post-policy press briefing, RBI deputy governor Swaminathan J offered some rare insights into how rate transmissions work. According to him, lenders have no obligation to pass on policy rate hikes or rate cuts in full to customers. Their decisions to increase or decrease rates, following RBI's rate actions, are entirely based on their deposit and lending portfolios.
The central bank only computes average deposit and lending rate transmission across all scheduled commercial banks and it's entirely possible that specific banks may have passed/or will pass on policy rates in entirety, while others may choose to transmit only partly.
Still, going by the latest RBI Monetary Policy Report, the skewed distribution of rate hikes becomes evident, and despite the central bank's earnest attempts to improve transmission by introducing newer benchmark rates from time to time, a lot of ground remains uncovered. TNIE dived into the data and below are some of the report's chin-stroking findings:
As against expectations of a further rise in deposit rates, the weighted average domestic term deposit rates on fresh retail deposits and retail and bulk deposits fell by 6 bps and 12 bps during April-August/September, 2023, or soon after RBI hit the pause button rate hikes. However, deposit rates for existing borrowers rose by 44 bps during the same period.
Of the overall 250 bps rate hikes since May 2022, rate transmission towards fresh retail deposits, retail and bulk deposits and outstanding deposits stood at 168 bps, 233 bps, and 157 bps respectively.
It means, barring bulk deposits, a near 1% rate transmission remains incomplete for other buckets. If outstanding retail/bulk depositors are yet to get 93 bps of rate hikes, the gap is 82 bps for fresh depositors.
Banking sector analysts may reason that the uneven transmission in deposit and lending rates during a tightening or easing cycle is common as banks book their profits based on the difference in lending and deposit rates. But, as has been argued for long, deposit rates see a faster and significant correction during a rate easing cycle, whereas transmission during a tightening phase remains slow and with relatively smaller hikes than in case lending rates. This anomaly needs a re-look as bank deposits comprise a good chunk of the household financial savings.
Meanwhile, the transmission is higher in lending, particularly, for fresh loans – at 196 bps. However, much of the rate hikes were passed on during May, 2022 - April, 2023. As the rate hike pause began in April, the transmission stood at just 15 bps from April through August/September.
As for outstanding loans, rates rose by 112 bps, of which 12 bps was during April-August/September. A good 138 bps is yet to get transmitted for outstanding loans.
The transmission in lending rates is even more uneven across sectors. There are two types of lending rates -- fixed/floating rates and floating rates linked to External Benchmark Lending Rate (EBLR). Take fixed and floating rates first.
Among large industry borrowers, the highest rate transmission was on fresh rupee loans at 213 bps, while – for outstanding loans – it stood at 103 bps. The next largest transmission was on trade at 211 bps for fresh loans, while for outstanding loans, the transmission stood at 130 bps. Likewise, MSME loans saw a rate transmission of 128 bps for fresh loans, while for existing borrowers, lenders passed on 96 bps worth rate hikes and are yet to transmit 154 bps worth rate hikes.
Within retail loans, other personal loans saw the largest transmission at 201 bps for fresh loans, while for outstanding loans, it was a mere 49 bps. Housing saw 113 bps rate increase on fresh loans, while for outstanding housing loans the transmission stood at 154 bps. Interestingly, housing loans is the only sector that saw bigger transmission of rates for existing borrowers.
In contrast, rates on outstanding loans for vehicles increased by just 31 bps, while the transmission on fresh loans is relatively sizeable at 119 bps. In other words, those who borrowed prior to the tightening cycle, continue to enjoy the benefits of low interest rates, as vehicle loans for existing borrowers saw the least transmission across sectors.
Lastly, education is the only sector that saw near uniformity in transmission on both fresh and outstanding loans at 111 bps and 104 bps respectively.
Coming to floating rate rupee loans linked to EBLR, RBI data is limited to fresh loans alone, but interestingly it gave a bank and sector-wise breakup. Broadly, public sector banks were at the forefront of rate transmission unlike private banks.
For instance for housing and vehicle loans, if public sector banks passed 187 bps and 170 bps respectively, private banks transmitted only 108 bps and 114 bps respectively. As for education loans, if state-run banks raised rates by 187 bps, private banks, unbelievably, reduced rates by 17 bps. However, the transmission is even for MSME loans at 185 bps and 172 bps for public and private banks respectively.
RBI introduced EBLR in 2016 for better rate transmission in lending rates. They now dominate the floating rate loans with an increased share of 50.2% in June 2023, up from 44% in March, 2022, while the age-old MCLR-linked loans' share fell from 48.6% to 44.8% during the same period. The increasing share of EBLR-linked loans with shorter reset periods and the increase in the MCLRs aided transmission to weighted average lending rates on outstanding loans.
Bank-wise, rate transmission on fresh rupee loans was higher among public sector banks than private banks, while on outstanding rupee loans, rates were higher among private banks.
Going back to bank deposits, of the 250 bps rate hikes, the transmission was near complete for deposits with smaller tenor of 7-180 days maturity at 239 bps, followed by 1-2 year at 225 bps. But between these two maturities lies another bucket of 181-364 tenor that saw a rate transmission of 207 bps. The rest of the tenors are far from full rate transmission. For instance, if 2-3 year tenor saw 169 bps increase, transmission for the 3-5 year tenor stood at 132 bps, leaving a good 118 bps yet to be passed on for depositors. Likewise, the least rate transmission was on 5-8 year and 8-10 year tenors that saw 121 bps and 118 bps increase.
Bank-wise, foreign banks seized the spotlight raising rates more than the rate hikes at 264 bps for outstanding deposits during May, 2022 to August, 2023. In contrast, the transmission stood at just 151 bps and 152 bps by public and private banks respectively. The average transmission across all scheduled commercial banks stood at 157 bps, which means, existing depositors are yet to get about 1% interest rate hike.
For fresh deposits, the transmission is near complete for retail and bulk deposits together, but if you consider retail deposits alone, it's not. If public and private sector banks raised rates by 174 bps and 154 bps on fresh retail deposits respectively, on retail and bulk deposits, however, the transmission stood at 242 bps and 195 bps respectively.
Rates on fresh term deposits declined during the first half of FY24, while outstanding deposits they rose with an increasing proportion of deposits getting renewed at higher rates.
Across tenors, the maximum increase was observed for shorter maturities up to 180 days. While the increase in term deposit rates exceeded lending rates, both for fresh and outstanding deposits/loans, the savings deposit rates of banks, which are a third of total deposits, remained almost unchanged, while current account balances with a share of 9.6% in total deposits earn no interest. This has moderated the increase in the banks' overall cost of funds and is mirrored in higher net interest margins.