Private sector banks fall behind in passing rate cut benefits to borrowers

Private sector banks failed to match the Reserve Bank of India‘s reduction in the interest rate in the past year to ease the pain inflicted by Covid-19 while their state-owned peers have been generous in extending the benefits to borrowers by reducing more than the central bank.

The average fall in lending rates for banks such as

, ICICI Bank,
and DCB was about 22 basis points on fresh loans compared with RBI’s 115 basis points reduction in the past year. A basis point is 0.01 percentage point. But the reduction of benchmark rates by state run banks such as the
, Indian Overseas Bank was 120 basis points, data from the central bank shows.

“Public sector banks have managed to raise more deposits at cheaper rates during the period and also had abundant liquidity support” said Rahul Bajoria, economist at Barclays. “This is likely to have helped them with the pricing advantage.’’

Banks not passing on the benefits of lower cost of funds has been a festering issue for decades. The central bank had tried every trick in its book to ensure monetary transmission which is often found to be slow when the rates go down, but quick to go up when the interest rate cycle moved up. It forced banks to link their lending to an external benchmark to ensure market related movement.

Weighted average lending rates on fresh loans fell from 8.64 per cent in March’20 to 7.44 per cent by March’21 for public sector banks. The same for private banks fell from 9.29 per cent to 9.07 per cent during the period. RBI’s benchmark repo rate was lowered from 5.15 per cent to 4 per cent over the period.

The lack of transmission has helped private banks report better profitability than their public sector peers. But it is also a fact that concentration of lending to higher yielding retail, and unsecured borrowers have boosted private sector’s profit margins.

“The difference in the NIM could be due to the structure of the loan portfolio of banks” said Bajoria. “Private banks loan book is mostly focused on retail loans, which are typically short tenor and rates have a higher mark up over the benchmark. But public sector banks are mostly focused on longer tenor loans like project loans where rates are fine priced over the benchmark”

For ICICI Bank the repo rate linked external benchmark rate stood at 6.7% while it’s net interest margins at the end of the March quarter stood at 3.84%. It’s peer private lender Axis Bank pegged its repo rate linked external benchmark rate at 6.9% while it’s NIM stood at 3.5%. While the country’s largest lender State Bank of India’s external linked rate is 6.65% while its NIM was at 3.34% at the end of the December quarter. Another public lender Bank of Baroda has pegged its lending rate at 6.75% while its net interest margins at the end of December quarter was at 3.07%. Both SBI and BoB are yet to declare March quarter earnings.

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