DNA Money Edit: Banks refuse to cut rates as RBI awaits helplessly

Three weeks after the Reserve Bank of India (RBI) cut repo rate -- the rate at which it lends to banks -- by 25 basis points, citing the need to boost investment demand in the economy, banks are yet to react. All large banks have refused to slash their lending rates and pass on the benefits of lower interest rate through the marginal cost of funds-based lending rate (MCLR).

State Bank of India (SBI) has announced a waiver of processing fee on car, gold and personal loans ahead of the festive season. That is a small mercy as the bank used to levy 0.35% of loan amount plus applicable service tax as processing fees.

While banks collectively resisted the RBI directions, they have now joined ranks to cut rates on savings bank accounts. A large section of country’s middle class who keep their savings in salary accounts is already feeling the pinch. SBI was the first to cut savings account rates. HDFC Bank and several other lenders including Axis Bank, YES Bank, Indian Bank and Bank of Baroda have subsequently reduced the savings rates. A majority of them have brought it down to 3.5% from the earlier 4%. This will surely push up the net interest margins for banks.

RBI said the reasons behind banks’ refusal are not ‘entirely satisfactory’ and announced the constitution of a study group to finalise a new benchmark lending rate that will help in faster transmission of policy rates. But in the absence of any competition among banks, will such moves yield any positive result? If RBI can’t make banks reduce rates, it should not interfere either when banks go for teaser rates and other market-driven rates.