Here's why banks behave like dodos. A plethora of excuses there: expensive deposits; loads of money to be stashed off in RBI reserves; huge pile-up of bad loans and the inevitable write-offs. Interestingly, the speed with which the same banks strike if in case there is a hike by RBI will stun you.
Every time India's economic growth engine skidded off the track in last two years, New Delhi blamed it on the Reserve Bank of India (RBI), in hushed whispers. The government always found the RBI's battle against inflation a roadblock in its growth agenda as the latter stubbornly kept interest rates high. The one-man army of Raghuram Rajan, who fought a long war against the mounting corporate debt, bad loans and bank inefficiencies, has now bowed out, and soon after, the central bank has merrily toed the government line, and cut the rates unanimously, joining in the celebrations. But they have encountered another stumbling block on the way: banks. The rate cut of 25 basis points (one basis point is one-hundredth of a percentage) on October 4 was saluted with a paltry five basis points (0.05%) reduction by a handful of banks, while most others are sitting tight.
Why banks behave like a dodo? A plethora of excuses there: expensive deposits; loads of money to be stashed off in RBI reserves; huge pile-up of bad loans and the inevitable write-offs. Interestingly, the speed with which the same banks strike if in case there is a hike by RBI will stun you.
Make no mistake, banks thrive on opportunistic banking. Of course, banks in India have come a long way in last one decade, the new-age Net-based banking and innovative products dazzling even their foreign counterparts. But when it comes to retail customers who seek to buy a new home or car, banks extract every pound of flesh. Incidentally, they are going big on retail loans and trying to woo you and me, in order to make up for the business loss from slowing corporate loan demand.
Big Indian companies now increasingly shun bank loans and prefer cheaper funds via corporate bonds, while banks are chasing them with 'loan' carrots. Huge loans may still be available to companies irrespective of their capacity to repay, thanks to the remnants of the once-rampant crony capitalism. But when it comes to lending the common man, they only lend people who own assets and having a proven track record of uninterrupted repayment.
Of the total 175 basis points (or 1.75%, from 8% to 6.25% now) policy rate cut by the RBI since January 2015, SBI has passed on 95 basis points (0.95%) to customers, with some benefits being restricted to new borrowers. What SBI has done is by far the best in the industry and all others lag behind the big brother.
While the repo rate (the rate at which RBI lends overnight money to banks) is pegged at 6.25%, retail loans carry a much bigger tag. The lowest home loan rate in the market today is 9.25% for women (and 9.30% for all others), provided by SBI. Other banks lend at 9.3-12% or even more. Car loans are still higher. For instance, HDFC Bank gives loans at 11.50% to 13.75%, depending on the client. Credit cards carry an excruciatingly painful rate, going up to 36%.
It is time for the government to introduce a cap on retail lending rates. Let the market economy decide the lower rate.
The writer is editor, DNA Money.
He tweets @AntoJoseph
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