Private banks take lead in rate transmission

private sector banks, lending rates, psu banks, pandemic, loans

Private sector banks have been leading the way in reducing cost of funds in the past year of pandemic even as state-run banks are not far behind. While the overall lending rates have fallen as much as 100 basis points, for private banks it has been more.

Weighted average lending rates for outstanding rupee loans of commercial banks fell 96 basis points- bps (one basis point is 0.01 per cent) between March 2020 and October 21, data released by the RBI indicates.

But these rates have fallen more sharply for private sector banks at 109 basis points compared to 85 bps dip for public sector banks and 187 bps for the foreign banks in the country.

The central bank has however lowered its benchmark repo rate much higher by 115 bps during the period and also introduced a number of measures to enhance liquidity of banks to deal with the pandemic induced crisis.

Policy transmission has been much faster pace since the pandemic. In the 19 month period prior to the onset of the pandemic, the benchmark policy 135 bps. But the banks lowered their lending rates only by 15 basis points between March 2019 and March 20 as reflected in the weighted average lending rates on outstanding loans of commercial banks.

A research paper by the Reserve Bank of India economist notes that the transmission of policy repo rate changes to deposit and lending rates of commercial banks (SCBs) has improved since the introduction of external benchmark-based pricing of loans.

The paper also adds that the transmission showed further improvement since March 2020 on account of sizeable policy rate cuts, and persisting surplus liquidity conditions resulting from various system level as well as targeted measures introduced by the Reserve Bank – cut in the cash reserve ratio (CRR) requirements, long-term repo operations (LTROs), TLTROs, refinancing window for All India Financial Institutions (AIFIs), sector/segment specific liquidity measures (Mutual Funds, Small Finance Banks, Micro Finance Institutions/Non-Bank Financial Companies), special open market operations and regular OMOs.

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