Despite 50 basis points (bps) cut in the interest rates by Reserve Bank of India (RBI) in the calendar year 2019, banks have cut rates by only 5 to 15 bps as the slow growth of deposits crimps the ability of banks to reduce rates in tandem with the central bank's rate cuts. A basis point is one hundredth of a percentage point.
A basis point is one hundredth of a percentage point.
State Bank of India and Indian Overseas Bank on Tuesday cut interest rates by 5 bps. While SBI cut rates across tenures to be effective from April 10, IOB cut rates for its two- and three-year loans.
SBI's one-year interest rate, or marginal cost-based lending rate (MCLR) to which most loans are pegged, is down 5 bps to 8.55%, the lowest among the banks. It also cut home loan rates for up to Rs 30 lakh by 10 basis points to 8.60-8.90%. But it came at the cost of its savings bank deposit rates which will now be pegged at 3.25% to 3.5%.
In both the monetary policy reviews on February 7 and April 4 this year, RBI cut the repo rate by 25 bps each. For better monetary transmission, the central bank is working on setting up external benchmarks to which bank loans can be pegged.
SBI has linked its cash credit/overdraft (CC and OD) rates above Rs 1 lakh to the repo rate for better transmission of RBI's policy rates. The benefit of reduction in repo rate by 25 bps by RBI (from April 04 2019) will get passed on in its entirety to CC/OD customers banking with SBI from May 01, 2019, the bank said in a release.
SBI's move follows close on heels of the largest private sector lender, HDFC Bank, which cut its one-year MCLR by 5 bps to 8.70% on April 8, 2019.
ICICI Bank had already revised its lending rates on April 1 anticipating a cut in the repo rate in RBI's monetary policy which was unveiled on April 4. The new one-year MCLR from ICICI Bank is 8.75%, down from 8.80%.
Bank of Baroda had said last week that it is not changing in its MCLR in April 2019.
Among the banks, only Axis Bank has hiked its MCLR by 5 bps to 8.90% and thereafter, it has kept its MCLR flat.
"We are conscious of the fact that there has to be effective and appropriate transmission of the rates. After the last meeting, I had held meetings with public sector and private sector banks. The banks have cut MCLR by up to 10 basis points. But more needs to be done," RBI governor Shaktikanta Das said in a press conference after unveiling the first bi-monthly credit policy of this financial year.
The issue for banks is that their deposit growth is lagging credit growth. The cumulative data from RBI released on March 27 showed that bank credit was growing at over 14% over the previous year while the deposit growth was at 10%.
The highest fixed deposit rates range from 8% to 8.35%. IndusInd bank offers 8% on its one-year deposits. Axis Bank offers 8.55% on their one-year deposits while IDFC offers 8.35% for their three-year fixed deposits.
With interest rates on 15-year public provident fund (PPF) at 8% and the National Savings Certificate at 8%, banks are unable to bring down their deposit rates.
NOT IN SYNC
- Deposit growth lags bank credit growth
- Bank credit growing at 14% while deposit growth is at 10%
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In both the monetary policy reviews on February 7 and April 4 this year, RBI cut the repo rate by 25 bps each. For better monetary transmission, the central bank is working on setting up external benchmarks to which bank loans can be pegged.
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