Banks quick to cut deposit rates, but not lending rates

Highest Fall In Lending Rates Is By 150 Bps While Deposit Rates Down By 250 Bps

THE rapid fire rate cuts announced by RBI have only been partially transmitted to the economy. This is evident from the fact that although RBI cut cashreserve ratio (CRR) and the repo rate by 400 basis points, the highest fall in bank lending rates has been around 150 bps while deposit rates have come down by 250 bps till date.
    The CRR — the percentage of deposits that banks have to maintain with RBI — was cut from 9% to 5% between mid-October 2008 and mid-January 2009 while the repo rate — the rate at which banks borrow from RBI — has been reduced from 9% from end of July 2008 to 5% early March 2009. The largest lender, SBI, has reduced its benchmark lending rate only by 150 basis points from 13.75% to 12.25% between October and now. While the country's largest private bank, ICICI Bank, has reduced its PLR only by 50 bps from 17.25% to 16.75%. Other PSU banks such as Union Bank, BoB and Bank of India have announced their plans to lower the PLR to 12% from April 1, 2009. But as of now, their PLR stands at 12.5%, which indicates a reduction of 150 bps from 14% PLR that was prevailing in October. Currently, PNB charges the lowest rate in the industry at 11.5%, indicating a reduction of 250 bps since October.
    In one of the meetings, even RBI governor D Subbarao had asked CEOs of large banks on whether there was any scope to lower lending rates. In response, bankers informed that almost 75-78% of their total loans is disbursed at interest rate below the benchmark rate. This, in turn, means that a majority of borrowers have benefited from the lower interest rates. Home loans, auto loans and loans to farmers are given below PLR. Besides, large top-rated corporates are availing loans below PLR. SBI is offering a fixed rate of 8% on home loans for one year while Canara Bank is offering a fixed rate of 8.25% for the same tenure. These are much below the benchmark rates.
    A banking report by Nomura said: "Besides slowing credit demand, rising credit risk and expectations of an increase in non-performing loans have kept bank lending more restrictive, diluting the credit channel of policy transmission. The level of banks' risk aversion can be gauged by the difference between the prime lending rate (PLR) and the reverse-repo rate (RRR, essentially a risk-free rate at which banks park their surplus funds with RBI. The higher the PLR-RRR gap, the larger the opportunity cost of holding money. In 2003, bank credit growth started picking up when PLR-RRR gap peaked at 6.5%. Currently, this gap is already at a high of 8%, suggesting a large disincentive to hold money. Yet banks remain averse to lending."